Financial Magazine
Is your cash flow management in line with the industry structure?
Introduction
Industries have different cash flow movements, which can be influenced by management. Some industries require large fixed investments and fixed operating costs which results to fixed non- influential cash-outflows, while other industries require no investment at all. Managing these different cash-flow movements ask for different management skills.
Cash flows can be influenced by contracts with suppliers, clients and the financial markets. When setting up your company cost structure it is recommended to seek professional advice.
Different types of cash flow
When looking at cash-inflows and outflows (vertically) as a function of time (horizontally), three different types of industry induced cash flow movements can be identified.
1.The Flat Liner
Cash In
Cash Out
Explanation of the graph:
• Cash inflow and outflow move together at the same level.
Management Skill:
• Be sure you’re the contracts with your suppliers and clients are renewed timely
• Minimal management skills needed
Example:
• Gas(oil)stations
2.The Chameleon:
Explanation graph:
• Cash inflow and outflow move together with high’s and low’s in time due to economic downturns or seasonal influences.
Management Skill:
• Control your costs in line with your revenues
• Hands-on management, anticipate market movements, be in time with cost reduction schemes
Example:
• Service industry
3.The Dinosaur:
Explanation:
• Cash inflows are subject to economic cycles and seasonal movements while the cash outflows are non influential.
Management Skill:
• Strategic capital management. The capacity of the company should be at an optimum level. Enough for economics’ of scale, maximized by the ability to cover cash shortages during the downturns.
• Be a squirrel, make an (cash) inventory in the summer, eat out (spend) of your (cash) inventory in the winter.
Examples:
• Hotel industry
• Airline industry
Influence your companies cash flow characteristic
Companies within an industry can influence their cash flow characteristic by hedging their cost structure against industry movements. By doing this your company can do well in economic downturns while competitors in the same industry face serous problems.
For example Hotel (dinosaur industry) can be changed to a flat liner company by closing long term contracts with tour agents. By preselling capacity to third parties (mostly against discounts) the cash inflow is stabilized at a fixed level. This is one of the cash flow management skills, which can be used in dinosaur industries.
The opposite can also be the case. A service industry (Chameleon) can be changed to a dinosaur by making variable costs like employees and rent fixed. A service industry which invest in real estate and therefore creates a fixed log term cash out flow will be faced with a dinosaur type company cash flow type while being in a chameleon cash flow type industry.
Albert Kluyver