Most businesses can survive periods of making a loss but they can only run out of cash once. In the turbulent economic conditions we are currently experiencing, the old saying, "revenue is vanity, profit is sanity but cash is king" has never been a more appropriate reminder of where business priorities should lie.

Cashflow is the lifeblood of all businesses and the primary indictor of a company's health. It is also generally acknowledged as the single most pressing concern of the majority of small and medium-sized enterprises. In a credit crunch environment, where access to liquidity is restricted, cash management becomes critical to survival so company owners need to take a more aggressive approach to budgeting and business planning.

Uncertainty is everywhere so it's essential that companies are able to maintain a high degree of flexibility in order to adapt to the changing times. No organisation can ensure it has the requisite flexibility unless it has a clear picture of its cash position at all times. For the greatest chance of survival, organisations must exploit the knowledge and skills of their finance professionals, particularly in relation to cashflow and liquidity.

Financial support
The most basic support that the finance team can provide now is to monitor the organisation's cash position and projected income over the coming months. This requires finance professionals to work with the company as "business partners", liaising with other departments to develop a clear understanding of the firm's current situation and its cash cycle.

This support from the finance function will help extrapolate the present financial position. By pinpointing key factors such as customers due to settle over the coming period; contracts in progress or further stock likely to be sold; suppliers to be paid and other expenses; and making allowance for any customers likely to default in order to determine any upcoming requirements, future cashflow bottlenecks and other crises can be avoided.

The next stage of support is short-run crisis management. Once the essential data has been assembled, the finance director will be able to highlight ways of dealing with any potential flashpoints. Funds may be needed in an emergency, so any surplus balances or available lines of credit must be identified.

If credit gets very tight, other methods can be used. Capital expenditure can often be deferred and spending plans should be reviewed as the assumptions on which they were based will have changed. In the same way, it is usually prudent to apply stricter
controls, by lowering managers' spending discretions. If there is a need to reduce costs quickly, procurement, discretionary bonuses, overheads and external contractors can be trimmed most readily.

One message that companies must take on board is that there is a danger of false economies. It's simple enough to place an embargo on capital expenditure or a block on recruitment. But these are blunt instruments. Take redundancies, for example. Laying off staff can be a false economy and costly if the positions need to be refilled in the medium term. A longerterm approach could help the business to refocus and plan for the future.

Improving cashflow
Having assessed the current situation, the finance team can help to improve the operation's ongoing cash management. This requires a more detailed analysis of the company's debtor stock, creditors, purchases and other spending. A firm hand also needs to be applied to cost controls, recruitment policies and investment criteria in order to limit cash outflows. Resolving problems in business processes that can lead to disputed invoices can accelerate payment. The impact of a major supplier failing can be as great as a bad debt, so this may be a good time to review the supply chain and terms of trade as well as credit management, underwriting policies and terms of sale. It's also worth considering credit insurance.

Looking at the longer term, the company needs to improve its understanding of future cashflow and use this knowledge to review its strategy and improve performance. Once cashflow is being clearly tracked, it's time to identify some longer-term performance markers. Cashflow is an outcome rather than a leading indicator of performance.

Understanding leading indicators and their financial impact is crucial for better performance management. Doing more of what generates cash satisfactorily and plugging any unnecessary drains on cash is more important than winning prestigious accounts. Utilising activity-based costing as an accounting method can help the business move in the right direction by refocusing on its more valuable customers, activities or stock lines.

Expect the unexpected
Looking at uncertainties in the longer-term, the introduction of scenario planning will allow a business to be better prepared for eventualities in the future. Rather than reacting to developments as they unfold and making hurried decisions, the business can turn to contingency plans or strategic initiatives which have been prepared well in advance.

This type of activity requires the skill to combine financial and accounting disciplines with business expertise. Unfortunately, many organisations have not yet transformed their finance function to have the structures, systems and people in place to provide this level of decision support. For companies which have not yet developed their finance functions in this way, the current downturn may provide the "burning platform" needed to introduce the necessary change programme.

The development of the finance team into true business partners who can add value across the whole business could also be more cost-effective than spending money on new systems. Enterprise resource planning, business intelligence and new structures certainly help to increase the efficiency of organisations. But for ad hoc analysis or projects, you need good people who are close to the business. It's only if the same exercise is to be repeated with some frequency that it becomes sensible to look into processes which would streamline or automate such activities.

Cash management is as much an integral part of the business cycle as any other part of the process. The effect of cash is real, immediate and, if mismanaged or not managed at all, can be very unforgiving. It can be a company's ruin. But, with care, it can also be its servant and reward. The mantra that all small firms should repeatdaily is: "control and prosper".

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