As business owners, we all know that “cash is king” and, if that’s so, then cash flow is the heart of the business pumping. Cash flow is one of the most critical components of success for any business, especially a small/medium-sized business. Without cash, profits are meaningless. Many a profitable business on paper has ended up in bankruptcy because the amount of cash coming in doesn’t compare with the amount of cash going out. Companies that don’t exercise good cash management may not be able to make the investments needed to compete, or they may have to pay more to borrow money to function.

“Despite the fact that cash is the lifeblood of a business — the fuel that keeps the engine running — most business owners don’t truly have a handle on their cash flow,” says Philip Campbell, a CPA and former chief financial officer in several companies and author of Never Run Out of Cash (Grow & Succeed Publishing 2004). “Poor cash-flow management is causing more business failures today than ever before.”

This article will help you understand what cash flow is, how it impacts profits, and tips on how to improve your cash flow.

Cash Flow Basics

What is cash flow? It’s basically the movement of funds in and out of your business. Under normal circumstances, business owners should be tracking this either weekly, monthly, or quarterly. However, since we are in crisis averted times at the moment with the COVID-19 epidemic and businesses not being able to function normally, it is imperative that you track your cash flow on a daily basis. There are essentially two kinds of cash flows:

• Positive cash flow: This is when the cash comes into your business from sales, accounts receivable, etc. is more than the amount of the cash leaving your businesses through accounts payable, monthly expenses, salaries, etc. This is called Inflow of cash.

• Negative cash flow: This occurs when your outflow of cash is greater than your incoming cash. This generally spells trouble for a business, but there are steps you can take to remedy the situation and generate or collect more cash while maintaining or cutting expenses. It is advisable to look for guidance by a professional (financial advisor, business coach, or even your accountant) should you be in this position. This is called the Outflow of cash.

Achieving a positive cash flow does not come by chance. You have to work at it. You need to analyse and manage your cash flow to more effectively control the inflow and outflow of cash. Your Business coach would recommend undertaking daily cash flow analysis to make sure you have enough cash each month to cover your obligations in the coming month. Most accounting software packages geared to small or medium-sized businesses – such as QuickBooks will help you produce a cash flow statement. There are also other websites offering free templates, including Winsmark Business Solutions and Office Depot. Your business Coach and accountant might have an easy to use Excel spreadsheet that might also work for small businesses.

Profit versus Cash Flow

Profit does not equal cash flow. You can’t just look at your profit and loss statement (Balance sheet) and get a grip on your cash flow. Many other financial figures feed into factoring your cash flow, including accounts receivable, inventory, accounts payable, capital expenditures, and debt service. Smart cash-flow management requires focusing on each of these drivers of cash, in addition to your profit or loss. Campbell explains: “Profit, as defined by the rules of accounting, is simply revenue minus expenses. Invoicing a customer for products or services you sold to them creates revenue. Actually, collecting the money on that invoice is what creates cash.” So, you need to structure your business to have a positive cash flow if you want your business to grow and increase profits.

“Growing your business puts a huge strain on cash,” Campbell says. “You almost always have to make investments and bring certain expenses ahead of achieving the higher revenue and cash flow that comes with successful growth. Maybe you want to open an office in a new city so you can build the business there. Or, you need to build a new facility so you have the capacity to sell to larger customers. Those scenarios (and others) require cash upfront.”

How to Improve Cash Flow

Most business owners see growth as the solution to a cash-flow problem. That’s why they often achieve their goal of growing the business only to find they have increased their cash-flow problems in the process. Plan for growth and the related cash outlays in advance, so they do not come as a surprise. In the meantime, it is recommended that you take the following practical steps to better manage cash flow, especially for the growing business:

1.Collecting receivables – To speed up the receipt and processing of receivables, we suggest several steps. Centralize your banking at one bank to get the best banking charges and facilities is a good start. Ask customers to pay by EFT. You can also try offering discounts to customers if they pay bills quickly and re-negotiate your payment terms in some instances to ensure cash comes in timelier. 

2.Tightening credit requirements– Businesses often have to extend credit to customers, particularly when starting out or growing. But you have to do your research beforehand to determine the risk of extending credit to each customer. Can they pay their bills on time? Is their business growing or faltering? Are they having cash-flow problems? One of the most effective methods of proper credit checks is asking them to fill out a credit application. You should also check references with their other suppliers. Another option for extending store credit is to accept credit cards. This will cost you a percentage, generally from 2 to 5 percent of the sale, but it may be a safer bet for getting paid on time.

3.Increasing sales – If you need more cash, it seems like the easiest strategy is to go out and try to attract new customers or sell additional goods or services to your existing customers. But this may be easier said than done. New customer acquisition is essential to a growing business, but it can take time and money to convert prospects into sales. Selling more to existing customers is cheaper and you may be able to do this by analysing what they’re buying and why – information that may even lead you to increase your profit margin and, hopefully, generate more cash. But be careful when increasing sales because you may just increase your accounts receivables and not actual cash if these sales are on credit. You have to test and measure your strategies and successes on a continuous basis.

4.Pricing discounts – One option to increasing cash flow is to offer your customers discounts if they pay early. While this practice may impact your profit margin, it may help your management of cash flow by incentivizing customers to make payments earlier than billing cycles typically require. Your company may also take advantage of this with suppliers and others that you owe, but be careful that your early payments of debt don’t leave you with a cash flow shortfall. Discounting should always be linked to a reward system rather than anything.

5.Securing loans – Short-term cash flow problems may sometimes necessitate a business taking out a loan from a financial institution. Some possible types are revolving credit lines or equity loans. Most of the time this type of borrowing accomplishes its goals, although during the financial crisis (like we are currently facing) which might be the only option for some businesses at this moment in time.

6.Getting Control of Your Cash Flow

Campbell suggests asking yourself the following two questions to get a sense about whether you have your business’ cash flow situation under control:

1. What is my cash balance right now?

2. What do I expect my cash balance to be six months from now?

“If you can’t answer these two questions, then strap yourself in for a wild ride,” he says. “You are on a roller coaster ride that’s about to become really frightening. You don’t have your cash flow under control.”

One way to keep that situation under control is by tracking your cash flow results every month (daily during this crisis time) to determine if your management is creating the type of cash flow your business needs. This also helps you get better and better at creating cash flow projections you can rely on as you make business decisions about expanding your business and taking care of your existing bills.

Get in touch and let me help you to manage your cash flow problems.

Antoinette Venter, ActionCOACH Business Coach
antoinetteventer.actioncoach.com | antoinetteventer@actioncoach.com