Clayton W. L. Mwaka

Hey there, I hope you had a fantabulous weekend. It’s a big yet small world! While others are in the thick of the weekend, others are just beginning it and yet others are quickly concluding it and getting back to work. Some are spending the weekend on the beach while others are traveling across the globe covering unimaginable distances. It’s a diverse and ever lively world. Whatever it is anyway, I’m referring to the weekend that falls around this time and dates I’m writing this blog, with utmost good faith that the calendar you are using is similar to mine. Enough of that now!

Today I would like us to get back to the subject of cash flow. My previous articles on cash flow attracted quite some responses, though it has been a very long time since I wrote elaborately about cash flow again. If you missed the articles, it’s never too late. You could still read Why An Entrepreneur Must Understand His or Her Cash Flows and Why An Entrepreneur Must Understand His or Her Cash Flows – Part 2 if you like. It’s up to you and I’m not forcing you. Ok? Kindly ignore any non-working links you find in the original post.  There are some very good and free articles on the net that could make entrepreneurs wiser but some people don’t care about them at all. It’s not a surprise then that we see routine failing businesses. Entrepreneurship requires wisdom. Don’t you agree with me?

So, what’s up today again regarding cash flow? I simply want to go a little bit beyond the aspect of liquidity and solvency with cash flow. For many entrepreneurial and business folks, a mention of cash flow simply makes people run to the aspects of liquidity and solvency. Liquidity, or the ability of a business to settle its liabilities or debts as they fall due; and solvency or the long-term financial stability and viability of the business, including ability to settle long-term debts and remain in operations, are two different things but are often related to cash flow. While liquidity is short term and relates to short-term cash flow, solvency is a long term measure.

Just a point of clarification, I’m not here to scientifically and unscientifically define and distinguish between liquidity and solvency today.  As I mentioned above, I would like to go a little bit beyond the aspect of liquidity and solvency with cash flow. What is the importance of managing cash flow beyond liquidity and solvency? Are there some other values other than liquidity that an entrepreneur gains from properly managing her or his business cash flows? Does cash flow affect other business operational areas and issues that are beyond the ability to settle debts and liabilities as they fall due?

Let’s take a look.

  1. Freeing up time for important things in the business. As a starting point, understanding and properly managing your cash flows frees up time for you and your team to do important things in the interest of the business. I mean you need time for business development, marketing, innovation and creativity, projects, facing customers, managing human capital etc., instead of counting numbers that don’t add up and glossing over cash inflows and outflows. By the way, the stuck reality is that the numbers will never add up if you avoid or defer doing the important things mentioned above. Do you understand this, and why? That could be a topic for discussion on another day. In addition to freeing up time, it helps avoid stress but instead you get peace of mind while operating your entrepreneurial ventures.
  1. Unlocking the value of your business and improving reward to the owners of the business. Understanding and properly managing your cash flows also brings to attention opportunities that can make you generate more profits and give you more returns. Isn’t this fantabulous? The opportunity to make more money, grow your business, and get better return on investment (ROI) is something every serious and forward looking entrepreneur should not miss. I’m not meaning that you should lose sleep in a vain manner over money. Ok? Be smart. Control your money and be on top of things. If money controls you then you are not a smart entrepreneur.
  1. Avoiding extensive use of credit in the business. Now, some business folks are an interesting sight running up and down literally every day, looking for credit, funding or something. Sometimes when you ask a few questions and look deeper into their business you simply find lack of seriousness. Poor business management, indiscipline, lack of strategy and tactics, worsened by poor cash management and lack of understanding cash flows, creates that never-ending urge and need for more credit. Extensive use of costly credit can be avoided. Additionally, you can also reduce the money you hold in your vaults as idle cash. I’m using the term vaults here but I know it could scare away some entrepreneurs. The reason is that vaults are usually associated with big companies and big cash. Don’t worry my dear. Even if you are a starter, keep on your game and play it right, you will think of vaults one day. Ok? That extra idle cash could generate interest to you or help you do something better. Good cash flow management ensures that you don’t have excess working capital tied up.
  1. Building a good corporate image. Good entrepreneurs like and deserve good corporate images. The problem is that the entire world has millions of people calling themselves, or being called entrepreneurs, when deep inside them is something else. I strongly believe that good enterprises must have good corporate images. Regarding cash management and your cash flows, if you do well you have capabilities to honor your debts in a timely manner, maintain good business relationships, have better credit rating, enjoy favours when you are in need etc. Come on Mr. Entrepreneur, don’t you agree with me? Do you think you can get this status and all related advantages when you are so daft and careless about your cash flows and cash management? Why would your business have a good corporate image when your suppliers are always quarrelling with you and talking ill about or swearing unprintable words about you, simply because you are always delaying their payments? Why would your suppliers or your bankers give you better credit terms and favours when you are a terrible guy in paying up? I mean why? Even the stakeholders close to you like employees and office cleaners including newspaper suppliers can give your business a hit by talking ill about you everywhere and to anybody that has ears to listen. Come on, you can do better than that!  
  1. Planning your investments. Investments are part and partial of enterprises. You need to continue identifying new investment opportunities and invest in lucrative ones for your business to grow and expand. Forget about your dreams about big businesses if you don’t invest. Cash flow understanding and management comes in useful because you will obviously need money to invest. Some of that money has to originate from within the business and this is possible if your cash flow management is optimized. You have to intentionally reduce reliance on external sources for your investments. You can also enjoy better negotiation terms, and stronger footing when you discuss, negotiate and decide on your investments. Are these not good news Mr. Entrepreneur?  
  1. Improving efficiency and effectiveness of operations in the enterprise. Cash is one of the vital resources in a business that determines to a great extent the efficiency and effectiveness of day to day operations of the enterprise. Effectiveness relates to achieving goals and objectives while efficiency relates to how best resources are used, in terms of converting inputs into outputs. Oftentimes people interchange these terms and also think they mean the same, yet they don’t. Anyway, businesses that do not optimize their cash flow management in most cases operate ineffectively and inefficiently. Let me illustrate this. Poor cash management can make you procure items in small and costly bits instead of taking advantage of volume discounts and saving on procurement logistics costs. Inability to carry out timely repairs on your machinery and equipment because of some lazy lack-of-cash syndrome will make you spend more money in due course because of major breakdowns, and even make you lose production hours and incur more labour costs etc. These inefficiencies translate into your business not meeting its goals and objectives hence being ineffective. There are endless examples. This is another powerful reason why an entrepreneur should understand and properly manage his cash flows.  
  1. Mitigation of risks. Another important reason why an entrepreneur should understand and properly manage his cash flow is that this helps mitigate risks in the enterprise. There are issues such as fraud, theft, internal cash shrinkage etc. that sometimes plague companies without the bosses even knowing. Occasionally the discoveries of these, way down the line can make leaders feel very silly and inadequate, for failing to detect such problems earlier. The amounts could be mind-boggling, but also sometimes immaterial. I recently read about a former lady employee in the US that stole money more than 10 years ago from her employer, and had the guts to issue a refund check (cheque) with a letter of apology. Well, maybe it was a touch of an angel, or some personal reflection and remorse. That’s a by the by. Good cash flow management also improves security of personnel. It also minimises operational risk and improve operational security. An enterprise is also able to better manage difficult business times when cash flow management is good.  

By the way cash management is part of treasury management though treasury management is much broader – covering management of cash, investments and other financial assets of the business. Big companies place quite a lot of importance on treasury management, involving cash management too. Get me right here. I’m not saying that small businesses do not need to properly understand and manage cash flows. All business of whatever nature and size need good understanding and management of cash flows. Period!

In conclusion, my additional opinion is that you could deploy technology and automation, in cash or treasury management in order to improve your management. I do hope I have added some value to your business or yourself through this blog today. Haven’t I? Come on. Speak the truth. Even if you have very negative feedback for me, please proceed and let me have it. Bitter medicine is good because it may help cure diseases, but don’t be vain just for the sake of negativity and feedback. Ok?

With every good wish and till then,

The Wise Entrepreneur

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