I’ve heard it said that cash flow and customers are the life-blood of any business. In a world where a lot of entrepreneurs and business owners run their business out of their checkbook, I guess it’s no surprise that so many companies run aground because they are not managing their cash flow attentively and proactively enough. I do admit to surprise when I meet another business owner who tells me that they never read their Profit and Loss Statement, or when they tell me they have no idea what the Balance Sheet tells them. I get it; I understand that unless you’re a CFO or a bean counter, you are likely to find financial reports as sexy as Jabba The Hut. But, if you run your business on QuickBooks (which many of you do these days…) there is a wonderful little report that you can run in about ten seconds. This report will tell you, on a regular basis, if you’re going to have enough cash to pay your vendors, creditors, suppliers, distributors, subcontractors, and employees when those payments are due. If you don’t have the cash to cover those obligations your profitable business could be out of business.
Cash flow is all about the timing of the movement of money, in and out of your business. When you make a sale, collect on a receivable, enjoy income from an investment, borrow money, etc. you will see cash flowing into your business. When you pay expenses such as rent, payroll, taxes, inventory, or buy assets, you will see cash flowing out of the business. The trick is to begin looking at those bidirectional flows and get a strong sense of what normal looks like, and take some notes on the size and timing of the expected cash inflows and outflows. When you have a sense of what normal is, you will be much more adept at being able to spot an anomaly and plan for it without it becoming a panic-inducing surprise. It is really very important to distinguish cash flow from profits. Profits are a snapshot of the difference between income and expenses on a transaction or over a given period of time. While you may be making some healthy profits, if you aren’t managing your cash flow appropriately, you might end up with all of your cash in accounts receivables or in the hands of your inventory provider when an important expense comes due.
I like to keep things simple for my clients and tell them to pay attention to three things to help them to improve their cash flow:
- Collections — If your clients and customers are not paying their accounts, you are financing their business with you for longer than you had planned, and the impact to your cash flow is sharply negative. Be proactive about your accounts receivable and develop a great relationship with the nice people who pay your invoices. Better to have a strong relationship and a friendly pattern of communication with these folks so that when you need their cooperation you can call in a favor and get your payment when you need it.
- Inventory — If your business sells products that you hold in inventory, be extra careful to manage your inventory very closely. Many a time, I have seen someone buy three times the needed inventory to save an extra 5% via a discount, only to end up paying much more in interest and finance charges to keep cash flowing. Don’t get crazy and buy more inventory than normal unless the discount is too good to pass up, and even then, use your good judgment and don’t overdo it.
- Accounts Payable — Inspect your credit terms with your suppliers and your creditors. It never hurts to ask for more favorable credit terms from people you do business with all the time. The same can be said for price concessions on inventory. It never hurts to ask for a discount, especially if you’re a good customer, and you pay your account well. Ask!
Here are three ideas about how you can work on your cash flow and improve it:
- Plan Ahead — Create some contingency plans to anticipate what might be required for cash. First calculate your cash flow requirements based upon a best case scenario, when business fundamentals are normal. Second, calculate them again for a scenario where business begins to slow measurably. Finally, put together a forecast of required cash for a future where your business environment goes into a steep decline.
- Forecast Cash — Forecast your cash coming in, and going out. Put a budget together, and follow it closely. Don’t make exceptions without very good business reasons that justify the exception. Remember to include in your forecast expenses that might be due quarterly, or annually, such as insurance premiums and so forth.
- Employees — Don’t be freewheeling when it comes to adding staff to your business. While people are always our most important asset, we don’t want to add staff if we can maximize our productivity and avoid adding expenses. Consider using overtime, or hiring part-time as creative ways to avoid overhead and additional labor expense. If you have too much labor expense, you need to make hard decisions to cut labor before it’s too late.
Unless you like to sing the blues, you don’t want to be careless with your cash flow. Remember that without cash flow your business is going to become ill or go into intensive care rapidly. Cash flow is the heartbeat of any business. Paying attention to your fundamentals is an essential factor in running the business in a sustainable way. We all understand needing to take care of our heart in our personal lives, and you need to eat right, exercise and see the doctor with your business as you would with your personal health. You must commit to protecting your cash flow, or you should give me a shout to help you figure out how to get started getting things going in a more healthy direction.
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