Sounds familiar, right ?
Ok, now you don’t need to tell me that how red faced you became when you heard this. I know every growing Entrepreneur would have faced this situation and somehow you would have managed also. But what matters is what did you do after that ? How have your financial systems evolved after such a situation? What do you do to keep a watch on your cash-flow besides being conservative in spending? Have you created anything that gives you visibility of next 3 months cash cycle? Do you really distinguish between short term and long-term cash deployment while making decisions? Do you keep spare cash for unavoidable situations?
Or living on the edge of cash has become a habit for you?
Most of the times we forget about shocks once that situation is managed. But smart entrepreneur will make sure to devise a system that alerts them well before their cash crunch and still smarter ones will put in place things even before it occurs for the first time.
Here are 5 things that will make sure you don’t get caught up unaware of cash situations :
1. Daily Cash flow snapshot
Most Entrepreneurs tell me that I know my business day in day out and I sign all the cheques, so why daily cash-flow? Reviewing Daily Cash flow snapshot will make sure you have an eye on cash inflow & outflow every day. Second, it will also ensure discipline in your finance team to be on the top of cash. Third, this review will keep a vigil on avoidable cash outflow.
2. Cash-flow 12 :: Next 12 weeks cash flow forecast
I see lot of growing enterprises struggles on cash flow forecast forget the startup. If you want to do one game-changing thing that allows you to be on the top of your business, install this tool. This tool guaranteed will make sure you won’t go loose on collections nor would you spend recklessly. You would have complete grip on the cash in the business which is extremely crucial for every business and absolute essentials for startups & high growth companies.
3. Super Collection Cop
This could be anyone from your Finance team or may be a separate person if there are volumes of collection. Look out for 3 qualities in your Super Collection Cop – Communication, Smart follow-ups and Last mile runner. Great communicator makes sure they don’t trade relationships with collections, Smart follow-ups using different modes and styles using emails, text messages, voice calls so that it doesn’t become irritating for customers (though there is whole science behind collections and may be will have another blog for this) and last mile runner makes sure that collections is complete when it is banked and he doesn’t become just happy getting Post Dated Cheques.
4. No long term cash deployment that eats up your working capital
If your Finance team is not capable to draw your attention, as an Entrepreneur you just make sure every decision of long term cash deployment like buying asset, paying deposit, giving advance to anyone or doing any special deal with customer with extra credit days is backed by long term source of finance like long term loans, your reserves or excess unutilized cash over your working capital. This principle will make sure you don’t aim mountains while digging your current road.
5. Create healthy Cash Reserve
Anything between 3 to 6 months of monthly fixed cost should be kept as Cash Reserves, though this is a rough benchmark it can change based on the nature of your business, size, cash flow cycle and seasonality of your business. And I know as a Start-up you will shout how is this possible? But you need to travel towards that to make it a strong sustainable business that can ride over some slow and patchy business cycles.
In business its said that Cash is King. So be on the top of Cash, set up alerts, have a binocular view of any upcoming cash crunch to resolve in time. After all your dream was to build an awesome venture and not to loose sleep over cash.