Poor cash flow management is the leading cause of business failure in the SMB world.

That’s why a good CFO’s top priority should always be solid cash flow management.

“But what does that actually mean?”

“How am I supposed to tell whether or not my CFO is doing that?”

These are the questions I get all the time, so this week’s post aims to answer them more formally.

In short, a sufficiently cash-obsessed CFO consistently does these 5 things:

1. Gathers Data

2. Identifies Trends

3. Makes a Game Plan

4. Forecasts

5. Optimizes the Inputs

Let’s get into it.

Gathering Raw Data

Anything relevant to your cash position is fair game here.

In most cases, your CFO should at minimum pull bank statements, A/R and A/P from the accounting software, assess financing options, and get a pulse on supplier relations.

Ideally, your CFO is reading the Cash Flow Statement and retrieving data for each section—Operating, Investing, and Financing Activities.

The goal of this step is to answer the following:

1. How much cash do I have today?

2. What are my A/R and A/P balances?

3. How profitable have we been over the last 3 months?

4. What financing options do we have (i.e. investors, lines of credit, debt, etc.)?

Next, your CFO should consolidate the data into a simple 13-week cash flow model.

You can read more here if you’re not sure where to start.

Identifying Trends

At this stage, your CFO should be looking for historical averages.

The goal here is to answer the following:

1. Is it just a good/bad time of the month for cash flow?

2. Is there seasonality in the business?

3. Are operating expenses growing faster than revenue?

4. Is revenue growing or shrinking?

5. Overall, are we generating more or less cash than we planned for?

The answers to these questions will reveal what’s happening at a high level. From there, the CFO can take corrective action or double down on what’s working rather quickly.

Making a Game Plan

The goal of game planning is not to override the firm’s core strategic objectives. Rather, your CFO should be making and executing as many micro-plans as it takes to course correct or maximize what’s going well based on the trend analysis.

At the same time, they are keeping the overall strategy of the business top of mind.

For example, if expenses keep going up, your CFO is looking for ways to simplify the manufacturing process without sacrificing quality or missing SLAs.

If cash is accumulating, they’re optimizing the product mix so that your customer base continues to respond well.

The key here is that your CFO is analyzing the data and taking swift action.

Forecasting

Once your CFO acts on the trend analysis, it’s time to revise the cash flow forecast to reflect the firm’s new cash position.

If budget cuts needed to be made, for example, those are reflected in the model going forward. From there, he or she starts optimizing again and making sure adequate controls are in place moving forward.

Optimizing the Inputs

Healthy cash flow doesn’t just happen, which is why a good CFO works backward by obsessing over the inputs.

The main ones are A/R, A/P, and the Operating Budget.

For A/R, your CFO should be looking for ways to streamline the collection process more generally, retrieve outstanding balances, and get paid sooner. In practice, streamlining collections could mean implementing a credit policy tailored to each client’s ability to pay, automating payment reminders, and offering several ways to pay.

Your CFO may work with a collection agency to collect outstanding balances if escalating efforts fail.

To get paid sooner, your CFO might push to offer small early payment discounts.

For A/P, the goal is to pay just on time. Good CFOs also look for ways to extend this timeframe by obtaining credit or negotiating more favorable terms with vendors.

Studying the Operating Budget regularly allows your CFO to trim fat on an ongoing basis and double down on what’s working.

Maximizing these three inputs in turn allows a good CFO to build a hefty cash buffer, saving the business from expensive debt in the event of unforeseen circumstances.

To do these five things well, your CFO should be spending 2-5 hours each week solely focused on cash flow.

For some businesses, this is likely going to be overkill.

That said, it’s far better to be too cash-focused than not enough.

If you need a 13-week cash flow model, hit reply or DM me. As always, I’m happy to help.

Putting It All Together

Here are your top takeaways from this week’s post.

1. You’ll know if your CFO is sufficiently cash-obsessed if they consistently do the following: gather data, identify trends, make game plans, forecast, and optimize the inputs.

2. Raw data includes anything and everything related to your cash balance—bank statements, A/R and A/P from the accounting software, financing eligibility, and more.

3. The purpose of identifying trends is to understand what’s happening in the business overall. From there, a good CFO should be taking swift action to do more of what’s working and less of what isn’t.

4. Based on their findings, your CFO should be regularly updating the forecasts and sharing relevant updates.

5. 2-5 hours each week of cash analysis isn’t worth much unless your CFO takes a systematic approach to optimizing cash flow. This is done by managing each input. The main ones are A/R, A/P, and the Operating Budget.

Hungry for More?

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4. Shoot me an email with your questions or requests for what you’d like me to write about next.

‘Til Next Time,

Connor