How to Manage Cash Flow

You can’t embark on cash management until you ask the questions: What is cash management and where does the cash even go?

Adjunct Associate Professor of Strategic Management at the University of Chicago Booth School of Business Kathleen Fitzgerald, MBA 03′, said the answer is entirely in the functions, which are interrelated in developing a strategy.

Fitzgerald broke down the process into four categories:

  1. Strategy
  2. Investing
  3. Financing
  4. Operating

Although many of these steps are generally the first to be addressed, Fitzgerald emphasized the importance of compartmentalizing each step, as they should all be included in a company’s statement of cash flow.

When considering strategy, one must ask themselves: What is my business? Companies should reevaluate business models and take note of existing competitive advantages.

When she refers to investments, she means day-to-day, which includes property, technology, training for staff/development, etc.

Financing, an obviously important factor in starting a business, ultimately answers the question: How do you pay for all of your investments? By looking further at the company’s retained earnings, debt, equity, and working capital.

Before any companies can master cash management, they need to look at operating management and how/how well it provides its goods and services. Marketing, advertising, and finding new markets can help improve any issues or inefficient processes.

Understandably, it takes time before companies begin to see results. The current business environment, according to Fitzgerald, makes things extremely challenging and companies must know how to navigate them in order to accomplish their goals.

In the end, results will show in the company’s balance sheet, which should include anything from unearned revenue, gift cards, subscription services, etc., long term debt (which is common for a company at any level), retained earnings (used to grow the company), net product sales, and operating expenses, to name a few.

To maximize profitability, Fitzgerald said it is important to both reduce any unnecessary expenses and increase revenue. Even then, companies should be cautious of liquidity risk, solvency risk by asking themselves the tough questions:

  • How many days do you have to pay your suppliers?
  • Do you have enough current assets to meet your current obligations?
  • How many times can you pay your interest expense out of earnings before interest?
  • What percentage of your company is financed with debt?
  • What percentage of your company is financed with equity?

Ultimately, the goal is to become familiar with the company’s cash cycle, which determines your cash needs and measures the time devoted to producing/delivering the goods/services. Inputs will vary depending on your business model.

The Polsky Center’s virtual Small Business Bootcamp was made possible through a partnership with the Rustandy Center for Social Sector Innovation and the Office of Civic Engagement at the University of Chicago, on behalf of a larger coalition of University groups and partners.

// We will be recapping the Bootcamp all week, but all the sessions were recorded and can be found online, here.

Interested in seeking more coaching and support? Apply for the Small Business Circle. Applications are due Thursday, April 28 at 5:00 p.m. CST. Learn more and apply. >>

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