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Cash Flow Management- The Most Important Survival Tool for a Small Business

Guest post by: MIchael Daley

Article Overview: What do you think is the most important life blood of a business? Is it profit, sales growth, or customer loyalty? You can have all three and still go out of business if you do not have the one thing all companies need to live; which is cash!

Cash Flow Management- The Most Important Survival Tool for a Small Business

What do you think is the most important life blood of a business? Is it profit, sales growth, or customer loyalty? While these are several important arteries of blood flow for a business to survive, they are not the heart which keeps the business alive. You can have all three and still go out of business if you do not have the one thing all companies need to live; which is cash! It takes cash to pay your employees, turn the lights on, open the door, and keep it open.

Having cash available when you need it is crucial but you also have to know how and when the cash flows in and out of your business. You just don't "know" these things. There are skills involved to measure, monitor, and manage cash.

How you can make cash flow work for you rather than against you are summarized in the following five rules.

Know How to Measure It

First, understand the income or profit and loss statement is not the same as cash flow. These are valuable analytical tools but only measure performance at a specific moment in time.

A cash flow statement, on the other hand, shows the movement of money in and out of your business over time. Consider this as a trend report. A balance sheet is the one other tool that measures cash but again, only at a particular moment in time. It is just like a snapshot while a cash flow analysis is like a movie.

Know the Causes of Cash Flow Problems

Cash flow problems can occur in any number of business lifecycles. Most commonly they occur in spending or receiving. Makes sense, since cash flow is cash coming in and cash going out.

If you want to grow, you have to invest in things like people, equipment, facilities, or inventory and that takes money out of the business. On the other hand, your clients might be slow paying and your company cannot create enough cash. A cash flow trend sheet can forewarn you of these needs for cash. If you are facing rapid growth, declining sales, or long collection cycles consider yourself prepared.

A cash flowanalysis can also show you cycles in your business. This can be a valuable forecast of business expenditures like marketing costs to support a big sale. If the sale is a success then you will see cash come into the business and you can form a plan to use it for continued growth. By tracking and trending the business cash flow by month, it will make it easier for you to plan your business next year.

Build Strategies That Can Maximize Cash Flow

One key here is to minimize fixed expenses. Call suppliers and see if you can get a discount. Find a way to handle spikes in your business without hiring additional people. Minimize your cash needs and conserve cash in the business.

Consider non-cash intensive payment options. Have you ever tried bartering? Make sure you are using business credit cards that award travel points to minimize cash expenditures on future business trips.

Establish clear payment terms and expectations with your customers and have a formal receivable collection process in place. Consider discounts for prepayment or require a deposit for large purchases.

Prepare For the Worst

When you see a trend that is restricting a positive cash flow, then you need to have tools at hand to correct the problem, fast. When developing a plan to infuse cash into the business, make sure you line up the sources for the appropriate use. For instance, short term cash problems can be handled with credit cards or a line of credit. Longer cash flow needs might be financed through long term secured loans or a capital loan.

Other ways to improve cash flow might be to improve inventory turn and carry a lower supply of inventory. Make sure you have no cash sitting around; deposit checks the same day you receive them. Avoid slow paying customers. Make slow pay customers pay their bill before placing another order. Pay your bills on the last date they are due. Consider leasing instead of purchasing equipment.

Grow Smart

Do a business plan and a cash flow forecast, by month, at the start of every year. Post your actual cash in/cash out accounts at the end of each month. Plan for growth. Ideally, every cash expenditure should generate cash in return. It might take a few months or years but a good return on investment is the purpose of any growth strategy. Make a complete analysis about how much you have to spend to meet growth opportunities and how long it will be before you will be able to pay it back; more importantly, how you will pay it back.

So in the end, your business goes with the flow, cash flow that is. If it's positive, survival will most likely continue. If it's negative, your business will be terminal. It's only a matter of time.

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Article Tags: business growth, business lifecycle, business plan, cash flow, cash flow analysis, cash flow statement, customer loyalty, inventory, marketing, sales



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