10 Cash Flow Mistakes

 

How Do You Protect Your Cash Flow? 

Here are 10 Cash Flow Mistakes to Avoid.

1️⃣ Not having a rolling cash flow forecast 

Forecasted cash flows show your company’s projected operating, investing and financing cash flows for the next fiscal period (and beyond for rolling cash flows), based on year-to-date results, fiscal year plans, and the ongoing effects of current strategic initiatives.

2️⃣ Paying suppliers early 

With the exception of a few strategic reasons, making early payments to suppliers outside of contractual terms has little benefit for your company while putting unnecessary pressure on cash flows.

3️⃣ Not securing access to a short term working capital line of credit 

Short term lines of credit for the financing of working capital assets are critical for growing companies or those with seasonal or irregular cash flow patterns.

4️⃣ Not negotiating sufficient access to short term working capital financing 

A line of credit with an insufficient limit will be of little use for a growing company faced with a large sale opportunity. A large line of credit which cannot be accessed due to an insufficient borrowing base of accounts receivable and inventory will pose a similar challenge.

5️⃣ Miscalculating the cash flow basis for bank covenant calculations. 

Covenant calculations can be based on:
✔️EBITDA
✔️Adjusted EBITDA (individual formula)
✔️Free Cash Flow (FCF)
✔️Operating Cash Flow (OCF)

Understand the specific terms provisioned in your company’s lending agreement.

6️⃣ Invoicing late

Invoices should be sent out as soon as contractual obligations have been met to minimize collection times and maximize the cash absorbed by accounts receivable. 

7️⃣ Not preparing a regular cash flow statement

Without the benefit of a cash flow statement, your company cannot determine and analyze it’s cash inflows and outflows by source.

8️⃣ Mistaking cash flow sources

Permanent increases in operating assets need to be financed with permanent capital, whether equity or debt (financing cash inflows). Cash from asset sales (investing cash inflows) for example, is not a sustainable source of financing for negative operating cash flows. 

9️⃣ Ignoring the quality of cash flows

Cash absorbed by low quality assets, such as accounts receivable with a low collection probability, or obsolete inventory, should be properly reflected as such in your company’s accounting bad debt or inventory reserves. 

🔟 Improperly budgeting cash availability for debt obligations

Debt obligations (principal, interest, bonuses, royalties, warrants, etc) are repayable with cash, so your company needs to accurately provision both the timing and the amounts correctly in the cash flow forecast to ensure obligations can be met when they come due. 

These were my thoughts. For more guidance, check out Deloitte's guide to optimize cash management.