Managing Cash Flow

Poor cash flow management is a silent, but deadly killer for seemingly successful businesses. Most people might inaccurately equate making sales to having a healthy cash flow, but even the most profitable businesses will fail if they run out of cash. Businesses need a constant flow of cash to pay their suppliers, creditors or employees. The information below will provide you with a summary of cash flow basics, including tips to improve the cash flow cycle in your business.

Understanding Cash Flow

Cash Flow Defined

Put simply, cash flow is the movement of money in and out of your business. Your business follows a pattern in which it generates and spends the income it earns.

The Cash Flow Cycle

The cash flow cycle measures the length of time money is used for the operation of your business before being converted into cash through payments from your customers. The less time money is tied up in your business operations, the better for the overall health of your company.Your cash flow cycle is composed of a series of cash inflows and outflows. Cash inflows typically lag behind the cash outflows, which can leave your business with a shortage of funds.

Inflows: are streams of income that your business earns. Inflows are typically derived from the sale of products and services to your customers. Proceeds from a bank loan, sales of stock, or interest from investments can also be considered inflows.

Outflows: are the expenses your business must pay. Buying goods or raw materials, procuring fixed assets, paying back loans, and paying salaries are examples of cash outflows.

Difference Between Cash and Profit

Your profits are not the same as your cash flow. Profit simply analyzes the income and expenses on your financial statements, but cash flow is more dynamic, as it tracks the timing of the receipts and disbursements of money in your business. For example, you may enjoy an increase in sales during a particular month, but if your customers donʼt pay on time, your business will mostly likely be short on cash. Understanding cash flow will help you to proactively manage the timing of the inflows and outflows of money in your business.

Benefits of Cash Flow Management

  • Increases speed of cash flowing into the company
  • Slows down cash outflows
  • Improves overall health of business
  • Saves money by taking advantage of cash discounts
  • Strengthens your ability to apply for loan to expand business
  • Reduces need to borrow money for cash flow issues
  • Provides you with flexibility to react to changes in the marketplace
  • Gives you an edge over competitors who may be limited by cash flow complications

Analyzing Your Cash Flow

Before you can begin to improve your cash flow cycle, you need to first troubleshoot existing problems. Start by writing down a list of all the problems your business is currently experiencing, and see how many of those items can be traced back to a cash flow weakness. For example, you may not have enough cash to pay the bills for the month, so you might try to increase sales in an effort to correct the issue. Marketing and sales are key drivers for generating income, but it is your accounts receivable department that converts sales into actual cash. You want to dig deep to get to the root of your cash flow problem.

Examine each of the components of your business that affect cash flow, such as accounts receivable, inventory, and accounts payable. Isolating each of these components will help you to more accurately identify cash flow issues.

Seek Assistance

Save yourself time, and sit down with an experienced accountant or business consultant to review the cash flow issues your business is facing. Contact the Northeast/ Texarkana SBDC to set up an appointment to review your cash flow situation. The consultations are confidential and there is no cost to you. Consultants at the SBDC are seasoned business experts that can help you identify solutions for your cash flow problems, in addition to reviewing your financial statements, and developing financial projections.

Tips for Improving Cash Flow

Below are practical tips that you could apply to improve your day-to-day cash flow.

Accounts receivable: represent the sales youʼve made that customers havenʼt paid for yet. Your goal for accounts receivable is to get your customers to pay as soon as possible.

Tips for Improving Accounts Receivable:

  • Make it easy for customers to make payments
  • Strengthen your credit policies and screen customers carefully
  • Take immediate action on overdue accounts
  • Create a solid system for collecting on overdue accounts
  • Request that customers fax, email or make orders online
  • Be vigilant about depositing checks and credit card receipts daily
  • Request that customers must pay upfront
  • Track the results of your collection efforts

Inventory: is the extra product you keep on hand to meet the demands of your customers. Avoid holding excessive inventory, as it keeps money tied up as an expense. Your goal is to sell inventory quickly at the best margins possible. If you are having inventory problems, then work with a SBDC business consultant to develop sales forecasts for your business.

Tips for Improving Inventory:

  • Avoid overstocking
  • Arrange inventory deliveries for latest possible dates
  • Negotiate discounts with your suppliers
  • Stay focused on your customer needs
  • Carefully test new categories

Accounts Payable: represents your obligations to pay off short-term debt.

Tips for improving accounts payable:

  • Extend payment periods
  • Double check invoices before submitting payment
  • Seek out cash discounts
  • Negotiate better terms with your suppliers
  • Avoid using credit cards

Next Steps

The effects of not having enough cash can be devastating to even the most profitable businesses. A strong cash flow cycle is the driving force behind the success of your business, and it is important that you continuously monitor the inflow and outflow of money in your business. Work with your SBDC business consultant to develop sound strategies for maintaining your cash flow. Properly managing your cash flow will not only ensure the continuation of your business, but it can also give you an advantage over your competitors.

If you need assistance in understanding and improving your cash flow cycle, contact the Northeast/Texarkana Small Business Development Center (SBDC) for a confidential business consultation at no charge to you.

Call (903) 434-8237 to set up an appointment.