The generator needs fuel to keep running.

As a generator needs fuel to keep a business operating, a business needs cash to pay the employees, suppliers, and other expenses, keeping the business operating.

Sometimes I think it is easier to fill up a can of diesel than to collect payment for the goods and services provided, especially if the business does not operate on a cash basis.

You need to always protect the cash flow of the business to be able to save for those dark days and to have enough to keep operating.

Hopefully, the generator has a gauge to indicate the fuel level. But when managing cash flow, we need to be aware of more than just a bank balance.

You need metrics to track the cash flow. Metrics help make timeous business decisions. I am not talking about litres but business metrics. So, what are business metrics? They are quantifiable measures to track, monitor, and assess the success or failure of business processes. Each business owner decides on the set of metrics to use that make sense for the business, for example, inventory metrics mean nothing if you are selling services. A Key Performance Indicator or KPI, on the other hand, specifically targets certain areas to measure performance.

Metrics that can be used in managing the cash flow are leads, conversions, average sales, repeat purchases, cash-on-hand, accounts payable, and account receivable.

The amount of leads impacts the sales levels, and the time debtors take to pay the accounts impacts the cash-on-hand and the ability to pay employees and accounts due. Clearly, a knock-on effect that can be measured and managed.

A cash flow cycle is measured in days. The number of days to convert a lead to a sale, to receive payment, and to pay accounts due. Thus, by reducing the number of days in the cycle results in more efficiency in managing the cash flow.

There are a few strategies to impact the cash flow cycle.

The first is to get a quick yes from the client and to deliver the service or goods as fast as possible.

The second is to have payment terms. Remember payment terms actually mean something if you actively follow up on outstanding invoices. If you keep avoiding calling on customers for payment, they will not pay until you follow up and the impact is that you do not have the cash to operate the business. Implement strategies to promote quick and easy payment, such as deposits, retainers, and debit orders.

The third is to revisit the expenses. If not done already, divide the fixed cost, e.g., rent, telephone, salaries, insurance, etc., and the costs that are directly related to the volume of work, thus the variable costs. The perception is that the variable cost automatically follows work volume, but it is not always the case. Leslie Hassler suggests the variable cost be prioritised by urgency following The Eisenhower Decision Matrix.

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Not Important – but urgent Expenses with clear deadlines and consequences for not taking immediate action (such as cancellation of projects / the generator running out of diesel!)	Important and Urgent Without these expenses, there would be no business.
Not important and not urgent This is nice to have and not crucial for operations	Important but Non Urgent These expenses are supplementary. Mostly incurred due to past practice but not urgently needed in the present.

I suggest you follow this model for all expenses because we tend to get carried away in good times and inadvertently place an additional burden on the cash flow.

Now is the time for the reality check. How many days of cash on hand do you need, after you implemented the above strategies?

Divide the monthly expenses by the number of days in a month to determine the daily cash need. The divide the bank balance by the daily cash need to get the estimated days of cash on hand. Ideally, you must be able to provide for at least 3 cash flow cycles.

And that is the reality check! Do you have enough cash on hand to provide for a cash flow cycle?

Business owners often think that they must have all the answers, and that is just a perception! Engage with your team or a mentor to assist with ideas to shorten the cash flow cycle and to implement new processes.

Just like the generator that cannot run-on fumes, a business cannot survive without cash flow management.