Cash flow is one of the most critical components of small to mid-sized businesses. In general, cash flow refers to the money coming into and going out of a business.
Research suggests that problems with cash flow are one of the main reasons for business failure. Trying to manage a business without a handle on the cash flow is nearly impossible, especially for start-ups and small businesses.
There are essentially two forms of cash flow – positive and negative
Positive cash flow results when there’s more money coming into the business through sales and accounts receivable than funneling out of the business through accounts payable and expenses.
Negative cash flow is the exact opposite and a problem for most businesses that do not focus on cash flow. The result is more cash going out of the business than coming in at any given point.
Profit vs. Cash Flow
Profits and cash flow are not one in the same. Selling products or services to your customers create profit on a P&L statement. But actually collecting on the outstanding invoice is what creates the cash.
Your business needs cash to operate, pay the bills, and pay employees. Keeping up with those payments allows your business to make the goods and provide the service, which creates the profits. Not having enough cash available will limit your ability to grow the business and increase profits.
Tips to Manage Your Cash Flow
Focusing on cash flow management will not only help to stabilize your business but will also allow you to invest in growth. There are a few ways to keep your focus and manage your cash flow.
Maintain Some Cash Reserves
There will be shortfalls in your cash situation, that’s inevitable. Be prepared for those shortfalls with enough cash reserves to cover a few months of expenses, payroll, etc. This is not an easy task, especially when you are trying to increase profits immediately, but it is necessary to ensure that your company remains financially stable during those times when shortfalls occur.
Get Your Customers to Pay You
This seems pretty obvious, but the sooner you invoice your customers and receive payment, the better off your cash flow situation will be. Make sure to send an invoice as soon as the goods are delivered or services are rendered. Assign someone the task of keeping up with customer invoices and sending past due notices.
Another option is to offer your customers a discount for paying before due date. A 2% discount may eat into your profits, but it might be enough to encourage your customers to pay early and help with your cash flow.
Get the Best Payables Deal
The opposite of the previous tip, by getting your creditors to extend longer terms on your payables you can delay payment while waiting for your customers to pay. That’s not the same as paying your bills late and incurring late fees. With a little bit of negotiating, some companies will extend payables to net-60 or net-90.
Scrutinize the Credit
Not all of your customers will be a good credit risk for your business, so make sure you do your doing your homework and checking their credit. Establish written credit policies and stick to them. Assign someone the task of checking the credit for each of your potential customers.
Delegate the Duty
Running your own small to mid-sized business is more than a full time job and you can’t do everything yourself. If you have staff, this may be one of the tasks you consider delegating to a trustworthy, detail-oriented employee. This person can monitor the cash flow, do the credit checks and keep up with accounts receivable and invoicing.
Secure a Loan
This may be the last option to pursue, but there may be a time when you need a little bit of help to get your cash flow to a manageable level. A short-term, low interest loan may help you to get back to a positive cash flow and be able pay off the debt quickly. This is a last resort, since this option will cost you money and eat into your profits in the long run.
The only step toward better management of your cash flow is to get a handle on what your situation is right now. What are your cash balances? What will your cash situation be in 3 months or 6 months or a year? If you can’t answer those questions, you already know you have a problem.
Continual monitoring of your cash flow is a critical step in the management of your business. Don’t confuse cash flow with profits. Understand your cash situation, what’s coming in and what’s going out. Take steps to make sure there’s more coming in than going out. And don’t lose focus on the cash flow equation to keep your business running for a long time to come.