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Managing Cash via Working Capital Optimization
Managing Cash via Working Capital Optimization
Here is a trick question for you: Which is more important – Profitability or positive Cash Flow?
For those of you thinking, “Wait, how are they different in the first place?”…just keep reading.
As you think about that question, consider that 82% of entrepreneurial businesses fail because of poor cash management!
I would never suggest that profitability concerns should be secondary to cash concerns, but understand that profit doesn’t pay bills, cash does.
Remember that Profit does not necessarily equal Cash Flow. They can be, and frequently are, significantly different, the main difference usually coming from working capital.
Working Capital
Working capital can simply be defined as the cash you have put to work in your business. What is the cash “working on”? Good question. Typically there are three areas:
- Granting your customers short-term loans (aka Accounts Receivable)
- Paying for all that stuff in your warehouse (Inventory)
- Short-term loans your vendors have given you (Accounts Payable).
Optimizing your working capital doesn’t have to be complicated. How well you have it optimized is always a function of how well you understand how cash moves through your business in the first place.
Cash Management
By asking two questions I’ve found I can get an immediate and reliable representation of how good a company’s cash management practices are. I ask:
- “What is your cash balance right now and how much do you need in the next 3 months?”…and if you don’t know this, either figure it out or go to stressballs.com and place your order now, don’t laugh…it’s a real site.
- “How many days faster or slower do you pay your vendors than you collect from your customers?”
Their answers reveal whether the company understands cash management blocking and tackling. Great cash management principles and basic refreshers can be found at Inc.com, Entrepreneur.com and CFO.com, ranked in my perceived order of simple to sophisticated.
Once you’ve got the concepts, we always recommend doing two things: One, prepare a 13-week forecast, and two, relentlessly attack working capital.
Here are some thoughts on optimizing working capital.
Accounts Receivable
It is your money. Go get it. There are myriad strategies (see above links), but never NEVER assume all your clients will simply pay you on time. Be proactive…reach out.
Inventory
Look out into the warehouse. If you see any inventory…there is probably an opportunity for improvement. Typically you need technology to help optimize your inventory levels. QuickBooks or similar are adequate in some cases, but often you need something more robust like Fishbowl. You don’t want to enter it twice. Get Fishbowl and integrate them seamlessly.
Accounts Payable
Ensure you’re paying your bills appropriately. Ask your vendors for terms.
Study the concepts, prepare and execute your plan.
Dave Chase is a Director at Amplēo. He is currently taking a sabbatical to move with his family to Chicago for a service opportunity. This will take him away from Amplēo for three years. He intends to return to Amplēo at the end of this assignment in July 2025.
Before becoming a Partner at Amplēo in 2011, Dave spent 9 years in various financial strategy roles such as divisional CFO at Honeywell International Inc in their Phoenix and New York offices. In 2007, Dave became the CFO, and ultimately the Consumer Division Executive VP, for Cricut, a large private equity-owned company in consumer products manufacturing, distributing, and retailing. Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $500 million. After a successful career, Dave has used his broad experience in global finance and strategy to assist Amplēo clients. Dave is active in the entrepreneurial and small business mentoring community in Utah and is a frequent speaker on finance and entrepreneurship.
Fun Facts/Hobbies
- Wakeboarding
- Snowboarding
- Ski-mountaineering
- Hiking
- Passion for humanitarian work
Education/Certificates
- MBA from Brigham Young University
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