No company ever failed when it had cash in the bank.
This simple rule evades too many executives, from green startup entrepreneurs to seasoned senior staff. The management of cash is so simple, yet so critical to business success, it should be one of the basic points of education for anyone leading an organization.
Cash is king, and should be treated as royalty
The first cash flow management mistake many make is treating non-cash as cash. Nothing spends like cash – certainly not debt, nor accounts receivable, nor hopes and prayers about the sales pipeline. Cash is cash, and counting other “sources” of cash is oxymoronic.
Accounts-receivable and future-bookings traps are far too common. Accelerating the collection of accounts receivable may produce cash, but only if and when the collections are completed. To leverage receivables in order to finance spending – before customer payments are made – is a debt tar pit of your own design.
Likewise, betting on future business can cause problems. Micrel, the semiconductor company I founded and led for 37 profitable years, developed a policy of never obtaining more that 20 percent of our revenues from any single customer. We learned this lesson the hard way when Xerox, a major customer of ours, exited a market and canceled their contracts with us. Though we were not banking their future business as cash, too many other companies take that ridiculous risk and collapse because of it.
Goes-intos and goes-out-ofs
The flip side of cash management is spending; what you spend on, why you spend, and the wisdom of not leveraging your company to finance what you cannot afford.
These decisions seem to get sloppier as businesses grow. Startups of the unfunded variety are appropriately frugal, because they have no choice. They lack fancy offices, expensive furniture and free snack food. Every spend decision is a critical one. If you show me a venture capital funded startup that has these fineries, I’ll show you a CEO who spends all his time raising the next round and not attending to his employees, corporate culture or cash flow.
This is not just a startup problem. Larger companies often spend needlessly, to the detriment of cash management. Before Micrel, when I earned a paycheck, I once turned in a travel expense report that was one fourth the average for that company. I chose to travel cheaply, eat fast food, and stay in economy hotels. My management took me to task for this frugality, fearing it set a bad precedent and would demoralize other employees. But I’m still here and that company is not.
Spending management is strategic (what you invest in for long-term returns) and tactical (what you buy that is necessary to create a functioning organization). When appropriate foresight is applied to the former, revenues increase, making cash management easier due to filled coffers. When appropriate frugality is applied to the latter, buffers are maintained for surviving business cycles, market disruptions, and outright catastrophes.
Check your checks
What you watch is what you understand. Every CEO establishes corporate gauges and constantly scans them like a pilot. Cash flow gauges are perhaps the most important. Weekly bank balance spot checks, and plotting of cash income and expenses, will show if your cash controls are working. If they are not, then it is time to coronate cash as king once again.