Cash Flow Control

Cash flow control is almost always the single most critical consideration for a business in serious trouble.

Even though there may be a myriad of things demanding your constant attention—cash flow control is the primary thing that can make the difference between success and failure of your turnaround project.

So, how do we control cash in a crisis situation while we are also trying to rebuild the business?

Well, working as a turnaround manager for many years, I have developed my own system for controlling cash in troubled businesses. I will discuss this system in this report, but I would like to hear from any readers who have also developed their own system, and how that system has worked for them.

My system consists of four different "levels" of cash flow control, each level becoming more severe in how cash is monitored and controlled.

Obviously, whichever level you choose to use will depend on the seriousness of your business's situation, so choose carefully.

Following is a description of each of the levels of cash flow control I developed over time:

Level 1.

This is for the business that has on-going, consistent, positive cash flow (even though it may be very small), with a small cash reserve.

It is also assumed you have competent people monitoring your cash flow, and that you have a system of cash flow control in place that will alert you the minute anything changes. I call this level of control “Watchful Waiting,”—while you diligently work to turn around your business and improve its cash flow.

As long as nothing further changes, this level of control is certainly adequate.

Level 2.

Action at this level takes over when your business has a serious slump in cash flow and/or your cash reserves are depleted. I call this the “Daily Cash Flow Watch System.”

I also move cash flow control to the CEO’s office with the objective to balance "cash in" with "cash out" (assuming your crisis has put you into a negative cash flow position).

In this system, cash receipts are projected for a 30-day period of time (that is CASH in—not sales and Accounts Receivable), and recorded on a simple spreadsheet for each day of the period. The same is done for projected daily expenses (CASH out—not purchases and Accounts Payable).

The total projected cash out must not exceed projected total cash in for the period. Then, each day, your accounting department is to present to you a record of total actual receipts and payments for the prior day.

If all is going according to your plan—fine. If not; you will need to modify your plan… and if necessary move up to a level 3 cash flow control system.

Remember—this is not an accounting system, it is a management tool.

You can download a sample Level 2 Daily Cash Flow Watch paper here.

This download also includes a blank form you can use with your own business.

Level 3.

I call this level a “Cash Flow Control Lockdown” because your business is on life support at this point, and survival is touch and go.

The concept here is to only spend today what you received yesterday.

Have your accounting people prepare a report for you each morning, outlining the cash that is needed for that day, and the total cash you received yesterday (plus any that was left over from the previous day).

It is then your job—each day—to determine who will be paid that day, and who will not. It is also your responsibility to contact those people who will not be paid and explain to them why they won’t be paid and when they can expect to be paid.

CAVEAT: Always under promise, and over deliver!

Nothing fancy here—just a diligent control over the actual flow of cash. The key here is to never spend more today than you actually have in the bank.

This cash flow control system is obviously only for the business that is in deep crisis with a critical shortage of cash.

Level 4.

This is a Total Cash Freeze, and should only be used in an extreme emergency.

The concept is simple: no one receives any cash for any reason (except payroll—employees need to receive their paychecks). You (as the owner/turnaround manager), or your designee, must approve any exception (like a critical C.O.D.) to this edict.

Obviously, this must be a short term action, say 5 to 30 days—just long enough to build a small cash reserve so you can move up to level 3. You are also responsible for explaining this action to your suppliers and creditors—they need to know when they will be paid.

* * * * *

It must be understood that during all these levels of cash flow control, you and your entire team must be working on a turnaround project that will result in a new form of business and an improved cash flow that will allow you to return to normal cash flow operations.

Many business owners believe they cannot implement a workable cash flow control system because there is not enough cash flow to control. However, rarely is this the case. You may not have "enough" cash—but you will always have "sufficient."

Of course, a business that is in crisis will also have bad credit, so normal borrowing is not going to be available. To address this issue, I have created a report dealing with bad credit during a business crisis.

You can access the Bad Credit Business Financing report here.

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