What with all the talk about “cash flow” and “cash flow management,” it’s worth your while to gain a better understanding of what these terms actually mean.
Positive cash flow, for example, does not mean the business is profitable.
A business can be turning a profit, and at the same time the profitable business could be dramatically and dangerously close to the precipice of having to liquidate and go out of business. Arguably, positive cash flow is more crucial to the small business’s success than is net profit because you can’t pay your bills with net profit, you need to have cash to pay your bills.
As noted here, the definition of cash flow management for business can be summarized as the process of monitoring, analyzing, and optimizing the net amount of cash receipts minus cash expenses. Essentially, net cash flow is an important measure of financial health for any business.
According to a study performed by Jessie Hagen of U.S. Bank, 82% of businesses fail due to poor management of cash flow. If your business constantly spends more than it earns you have a cash flow problem. For small businesses, the most important aspect of cash flow management is avoiding extended cash shortages, caused by having too great a gap between cash inflows and outflows. You won't be able to stay in business if you can't pay your bills for any extended length of time!
As Entrepreneur observes in a recent report, new startups should fully understand that running out of money is one of the primary reasons that businesses fold shortly after a launch. This scenario is a proven statistic, but startups can avoid joining the ranks of failed businesses by being smart about how they spend their startup capital, as noted in the following five tips:
1. Know when you’ll break-even
Knowing the point at which you’ll break even won’t necessarily impact your cash flow, but it will give you goals to strive for and a ready-made target for forecasting where your cash should go in order to reach that goal.
2. Always maintain a cash reserve
Every startup should expect shortfalls. Having cash reserves for those lean times lessens the blow, the stress and the distractions, and allows you to stay focused on growing your business.
3. Collect receivables immediately
Try to make any invoices “due immediately” and limit the use of net terms longer than 15 days. If you can do so, delegate the task of keeping an eye on receivables and customer follow-up to get money in as quickly as possible.
4. Extend payables where you can
While you want to bring payments in as quickly as possible, work with your suppliers and vendors to get the best deal you can and extend payables to net 60 or more, if possible.
5. Make the best use of technology
Always back up your files and cash-flow spreadsheets. Not only will this keep your data secure from local file corruption or data loss/theft, but it will also make it easier for you to gain access from anywhere you have an Internet connection.
In conclusion, it’s fairly obvious that a lot of time and resources are at stake in this process known as “cash flow management.” There is a lot to lose if the management process is not embraced by management; but a lot to gain if the process is embraced and run well.