Duke Research Advantage

This week we will feature a four-part posting from Duke Strategy Professors Will Mitchell and Richard Burton. Mitchell and Burton outline four principles for leading your business as an opportunity driven strategist in tough times, rather than falling into purely defensive positions that are destined to be overwhelmed by economic pressures.

PRINCIPLE 1. PROTECT YOUR CASH FLOW

Tough times mean that credit is tight. The money you generate from your operations will be the money you can count on for the foreseeable future, no matter how profitable you may be. While investors might love your business in principle, they often will have little cash to give you in practice. Cash flow planning takes some of uncertainty out of tough times and puts you more in charge of your own destiny.

Seek both savings and revenue. Protecting your cash flow begins with cost reductions. Tight control on hiring is an obvious need. Travel is also an easy place to begin, whether this means cutting unnecessary travel or traveling coach (trust us, your legs will wake back up from their crowded coach seat positions once you walk around for a few minutes). Experiment with new “virtual” ways of staying in touch with suppliers, customers, and partners. But protecting revenue is equally important. Protect your best customers and look for new markets, in order to find new revenue rather than simply seek to control costs.

Manage cash flow timing and predictability. In addition to scrutinizing costs and revenues, cash flow planning also involves both timing and predictability. Regularly examine when and how much cash is coming in and out. In tough times, there are deals to be had from your suppliers. By committing to buying ahead, you can lock in good prices on commodities, supplies, and leases. On the revenue side, tie down future sales through contracts with your best customers. Looking ahead and locking in good deals with suppliers and customers puts a base under your cash flow and creates predictability – taking some of the uncertainty out of tough times.

Create forecasts and demand accountability. Put together a detailed cash flow forecast and review it ever day. Senior members of your company – from the board, through executive officers, through unit leadership – need to push cash flow management down to every operating unit and review the results. In turn, you need to demand accountability for managing the cash. Everyone must go beyond a simple cost cutting mindset to a philosophy of cash flow planning that places equal focus on predictability and expansion opportunities.

Controlling your cash creates access to credit. By demonstrating control and managing the predictability of your cash flow, you reduce your uncertainty and, in turn, gain credibility with your bankers and other credit sources. This reduces your risk and allows you to negotiate better terms and gain access to lines of credit that will allow you to move on unexpected investment opportunities.