A business’s cash flow is its lifeblood. Should it stop, so does the business.
Effective cash flow management is about knowing when to invest in growth, how to predict shortfalls, and establish trust with bankers and suppliers. Common issues that mar this management include expanding too rapidly, poor accounts receivable tracking, and giving customers overly generous credit terms. Effective strategies for cash flow management allow you to cover payroll, vendor invoices, and interest on bank loans, all while leaving enough money for controlled growth.
Fortunately, there are many practical ways to control cash flow that can help you weather both small daily storms and future financial tsunamis.
Brush Up on Your Accounting
Yes, you have a CFO for a reason. But just as it helps to navigate Paris if you parlez français, you can better address cash flow concerns if you can read a balance sheet and know the differences between cash and accrual basis accounting. Similarly, knowing the importance of cash flow to your business can prevent you from getting into a cash-poor position from which you may not recover.
Pay Close Attention
Both you and your CFO need real-time access to your business’s financial statements to assess your cash flow situation quickly and easily.
Just don’t confuse cash flow with profit. Indeed, looking at an income statement has nothing to do with figuring out whether your cash flow — let alone your business — is healthy. You must also consider your inventory, expenditures (like debt repayment), accounts payable/receivable, and the like to gain a complete picture of how money is flowing in and out of your coffers.
Use the Right Tech
MS Excel remains useful, but it is smart to avail yourself of the best financial tools to manage cash flow. For instance, the popular financial program QuickBooks has a cash flow planner that allows you to project money-in and money-out transactions over both 30- and 90-day periods.
Make Frequent Projections
Do you know how much cash you expect to flow in and out during a given period? You can keep your business out of trouble by making frequent cash flow projections. Paying close attention to cash flow data and variables on a spreadsheet, for instance, lets you make more accurate projections of future monies coming in and out.
You can help forecast your sales and expenses (especially big-ticket purchases that might strain your cash reserves) by considering industry norms, averages, and trends. Be sure to compare your projections against your actual performance to gauge their accuracy.
Know When You Should Be Profitable
No matter their size, many start-ups operate in the red for years before turning a profit. For example, it took Twitter 12 years to see its first profitable financial quarter.
Eventually, though, your business will have to start generating profits and positive cash flow. Creating a profitability goal can help your staff develop healthy practices around expenditures and budgeting. It can also inspire your managers to work towards generating a certain level of business.
Spot Problems Early
Nip cash scarcity in the bud. Small financial problems like an unpaid customer invoice can become exponentially larger and more unmanageable if it goes unpaid for longer than was agreed upon. Such problems can, in turn, strain relationships with both your creditors and lenders.
Moderate Your Growth
The old saying, “you need to spend money to make money” is true. But plotting your business’s growth can be tricky. You may, for instance, need to buy raw materials, hire employees, or pay for new manufacturing facilities — all significant expenditures.
But it’s all too easy to see your daily operations starved for funds, thanks to overly ambitious cash outlays that aren’t matched by increased sales. Be sure to temper your ambitions with realistic goals and a workable growth plan.
Healthy cash flow is an indicator of a healthy business. Having enough money available to cover your day-to-day is as important as having it available for growth — arguably even more so. While risk in the form of spending your working capital is at the heart of entrepreneurship, it’s still smart to use these practices to track the monies coming in and out of your business. Remember: the blood (your cash flow) is the life (of your business)!
Sean Plummer | Contributing Writer