The Big 4 Capital Users

In an earlier post entitled Cash Management – It’s Not About the Cash Account I gave a brief definition of what Cash Management is.  Here again is that working definition:

Cash Management – A Simple Definition

Cash Management is the process of planning, coordinating, and directing business activities that directly and indirectly impact the cash balance of a company.

With that definition in mind, I want to start a discussion of some of the activities that influence cash.  To do this, I will use the acronym CRIP which stands for:

C –  Capital Equipment.  (Fixed Assets and their financing)

R –  Receivables (Accounts Receivable and Credit and Sales Policies)

I –   Inventory (Controls, purchasing policies and procedures, and levels carried)

P –  People (Human resources, employment practices, training, turnover, etc.)

Why Use an Acronym?

I find this acronym helpful as a reminder of the key areas that have the greatest impact on the cash position of a company.  A Statement of Cash Flows will highlight some of the significance of these items, but it helps to be more deliberate in examining these elements of operations, and that is the purpose of this acronym.

Zeroing in on Cash Management is critical for any company.  You have probably heard it said that even very profitable companies fail if their cash flow is insufficient,  I’ve seen this up close on more than one occasion.

Looking a Little Deeper

Let’s consider briefly the significance of the four areas above.

Capital Equipment – For some companies this is not a significant area of concern.  For others, like a manufacturer, this represents a significant use of capital and ultimately cash.  Even for a non-manufacturer there will undoubtedly be a need for some capital equipment (i.e. desks, computer equipment, filing cabinets, etc.)  There are a number of things that can be done to control this area, including being willing to consider buying used equipment for both manufacturing and office needs.

Receivables – This is often a prime area to improve a company’s cash position.  It is also an area where opinions create tremendous conflict, particularly as it relates to credit and collection policies.  There are many reasons for that conflict, such as making sure policies do not destroy sales or are so lenient that sales are never collected.  Additionally, deciding who has responsibility for collecting from customers and determining if sales commissions will be paid on sales or collected sales can be major areas of contention.  And, let’s not forget about the cost of acquiring and retaining customers, which makes it even more important to qualify your customers up-front and maintain an “on-going” vigilance.  All that said, the reality is, “A sale is worthless unless it can be converted to cash

Inventory – Here is a personnel favorite of mine.  I think that is because I have seen so much capital tied up in inventory at several firms.  These companies found themselves cash strapped and hindered in their ability to grow.  Additionally, poorly managed inventory creates untold stress because of strained relationships with customer, vendors, and banks.  It even causes internal conflict between administration, sales and marketing, and operations, particular if the item needed for sales is not available.

People – When it comes to people, the issue is more than just the cost of payroll, taxes, and employee benefits.  Those are significant, but equally important is having the correct people in the right positions.   Additionally, having good communication within the organization and outside the company is vital.  It is amazing how often one department lacks an understanding of what another department does.  This results in inefficiencies, errors, and increased cost.  Sometimes it can even be wise to combine areas to improve information flow and reduce errors and costs.   It also can make considerable sense to contract for certain services if you simply cannot justify someone on a full-time basis.  This last point is particularly significant in smaller companies that need certain services but on a periodic basis.

AimCFO has a history of identifying key areas where cash flow can be significantly enhanced.  In future blogs I will be delving into the above areas in more detail.  In the meantime, if you think you may need some help in any of these areas, please contact us at this link: AimCFO – Contact

As always, your comments are welcomed.

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