The importance of managing your business’ cash flow
Tuesday, November 05, 2019
Cash flow is the backbone of any successful business. However, most business owners make the erroneous assumption that good revenue and profits indicate stable financial health. According to the Small Business Administration, however, a lack of cash flow management is the No. 1 reason most businesses fail.
“Revenue is vanity, cash flow is sanity, and cash is king.”
What’s Your Cash Flow Situation Like?
Cash flow is the money that flows into your business, and out of it. The inflow of cash to your business comes from sources like invoices and customer payments, savings and returns on investments.
Your cash flow includes all your business costs — inventory, employee salaries, rent, accounts payable to vendors, and other day-to-day operating expenses. The cash flow of your business is tied to all your activities, and operations.
A positive cash flow indicates that you have more money comes into your business than leaves it. This gives you enough funds to repay investors and re-invest in your business. A negative cash flow means your business is spending more than it’s making. This is a red flag, and unless you act fast this can end in bankruptcy.
Why Is Your Cash Flow Important?
When your business generates a positive cash flow, it means you’re making enough to sustain your business. Your business is financially under control, and you can meet its everyday needs, without any debts.
Business Control: A positive cash flow gives you financial control. If your business runs into debt, you may have to look for financial help from debtors or investors who will want a say in how the business is run. This can clash with your ideas of how you want to run the business and put you in a position you don’t want to be.
Flexibility: Cash flow gives you the confidence to make critical decisions and doesn’t put you in a fix when you face emergencies. With extra cash coming in, you can create a contingency plan, which will come handy when you face an unexpected business situation.
Growth: Positive cash flow lets you reinvest in your business for its growth. This can be expanding to a new location, redesigning your infrastructure, hiring more staff, or spending on marketing.
You can even pay out dividends to investors and shareholders, strengthening their relationship with your business. Overall, a strong cash flow makes your business look good to potential shareholders, current investors, and debtors. Your business will be able to operate proactively, rather than just defensively.
Analyzing your cash flow statement will reveal where your money went, in a way that even profit-and-loss statements can’t. For instance, if you bought more inventory, invested in new equipment, or even extended credit to customers, you’d have used cash: this shows up in your cash flow statement.
They also provide better KPIs for what your business should achieve, and help you take stronger financial decisions. To learn more about how to analyze your cash flow refer to this cash flow guide.
How Can You Improve Your Cash Flow?
A positive cash flow takes careful organization and planning. Here are some ways you can improve your business cash flow:
Remind Your Customers: Don’t keep waiting for your invoices. Send email reminders or invest in an invoice software tool that automatically does this for you.
Consider Invoice Factoring: Invoice factoring is where a third party buys your invoices from you, with a cash payment upfront. This is useful when your business depends on the money you make from the invoices, as you don’t have to wait around for money to take business decisions.
Strategize Your Price: While it’s important to offer competitive prices for your products and services to keep your customers happy, it shouldn’t be at the cost of filing bankruptcy. Research the market and test your product prices over time to see how high customers are willing to pay for what you offer.
Reduce Operating Costs: As a last resort, consider reducing the costs of operation. Take steps like setting a cost-cutting goal, reducing extravagant perks and benefits for employees, and even outsourcing some work to freelancers.
While it’s good to have a positive cash flow, having too much cash on hand may mean your business is missing out on opportunities to open up other revenue paths. Without enough cash flow, you may have to sell off assets or give away a larger chunk of your business to an investor.
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