Cash preservation is typically a top of mind concern for any business. Having provided CFO consulting for many start-ups and growing businesses, I’ve seen this be particularly important. In many cases, a course of action has a different result from a cash flow perspective than a profit perspective. A decision may make sense from a reduction in expense but at what cost in cash? As decisions are made on a daily basis, cash flow versus profit can be a fundamental basis for determining a direction to choose.
Cash flow versus profit examples:
- Equipment purchases
- Buy versus lease
- Hiring decisions
- Paying off loans and other debt
Equipment may be needed to create efficiencies, reduce cost and/or to create capacity. For a start-up business, decisions need to be made with the overall near term return in mind. Questions to ask include:
- Will the efficiency gain be realized at the current production capacity or is the analysis based on a future requirement?
- Will spending those dollars today result in a limitation of available cash in the future?
- While the bottom line might be impacted by making the decision not to purchase, what is the opportunity cost associated with the use of cash?
- What else might the cash be spent for that would have a bigger impact?
No one has absolute clarity in to the future, so at times, the decision might simply be that this feels like too much cash to spend now since the expense reduction impact is not large enough near term. Alternatively, if not making the purchase decision impacts your long-term growth strategy due to capacity constraints, at what point is the that top line impacted by a stay with the status quo strategy?
If the decision is made to make a purchase, the next decision is how to pay for it. Will a lease, capital loan or payment at the time of purchase be the best approach? Both a lease and capital loan will preserve cash but have an expense impact. The lease will have a more significant impact since it will likely be characterized as an operating lease and the full monthly payment will be expensed. A capital loan will have interest associated with it that will be expensed. However; with a capital loan you may lose future borrowing capacity as a result of a loan if other assets are collateralized. Make sure that only the asset being acquired is the collateral for the loan. Otherwise, you will need to ask the lender to subordinate their position if you seek additional financing.
Having a longer-term financial plan allows business owners and managers the opportunity to analyze not only the income statement impact of a spend decision but also the cash flow and balance sheet impact. If you need help developing a strategic plan tfor the cash flow of your business, please contact us!
Sharon Foster is a Consulting CFO for vcfo Austin. As a top financial consulting and HR consulting firm, vcfo provides contract CFO and CFO Consulting services, HR outsourcing and interim HR services. Additionally, we provide technology strategies consulting and cost-effective recruiting solutions. Whether you seek part-time, interim, project-based or full-time support, vcfo’s customizable engagement model will fit your specific business needs.