Cash Flow Management and Your Business

Welcome to our monthly catch up. This month we want to talk about something that is at the heartbeat of every business. Cash.

As business owners we’ve probably all gone through the angst of wondering how the bills are going to be paid. Having enough cash in the bank is a necessity for your business’ survival. Cash flow management is of paramount importance in ensuring your business has the resources to cover its operations and meet other obligations, such as paying debt.

Let’s talk cash!

Importance of Cash Flow in Business

You may have heard the adage: cash flow is the lifeblood of a business. While it may sound cliché, it rings true when it comes to your business’ survival. Positive cash flow is necessary for managing daily operations, taking advantage of new opportunities, and being prepared for unexpected expenses.

About a third of businesses in the U.S. do not survive past two years, with insufficient funds being one of the main reasons for the high failure rate. It is therefore critical that businesses maintain a healthy cash flow.

The Cash Flow Gap

A cash flow gap occurs when the cash coming into the business is not sufficient to cover the cash going out. Reasons for a cash flow gap include:

1. Incurring expenses without generating sufficient income.
2. Inadequate accounting records – not knowing a shortfall is coming.
3. Inadequate receivables collection.
4. Inadequate or no budgeting and forecasting.
5. Not maximizing the ways the business can accept payments.
6. No “rainy day” fund.

Minding the Gap – Strategies to Counter a Cash Flow Gap

1. Proper Financial Planning – Develop a plan to track money coming in and going out. Allocate funds for different categories of expenses such as for growth, ongoing operations and emergency savings. Many software tools are available to help with this.
2. Monitor Cash Flow – Always know your current cash balance and your projected cash balance six months into the future. Use accounting software to create charts that monitor cash flow continuously.
3. Use Financial Ratios – There are many financial ratios but for a quick gauge of your company’s liquidity situation, use the Quick ratio. This is liquid assets (cash, accounts receivable) divided by current liabilities (accounts payable, other obligations due within a year). The goal is for this ratio to be greater than one.
4. Focus on Cash Over Profitability – While it is important to make a profit, your business will not survive without adequate cash. Invoice customers promptly and set clear payment terms to accelerate cash inflows.
5. Optimize Payment Terms – Offer early payment discounts and negotiate longer payment terms with suppliers. Strike an appropriate balance between early payment discounts and the impact on cash flow.
6. Proper Expense Management – Use proper expense management practices. Where feasible repair rather than replace equipment, sell excess inventories at a discount, and consider using bartering services, to free up cash.
7. Invest Surplus Funds – If you have the luxury of surplus funds, invest it in interest-earning instruments such as certificates of deposit (CDs) to earn a return. Remember to leave some liquid funds for immediate needs.

Funding Options to Enhance Cash Flow

1. Reinvest Profits: Allocate a significant portion of profits back into the business for growth. Perform careful revenue projections before reinvesting, to ensure you have adequate cash available for immediate needs.
2. Business Loans: Consider business loans for large projects or renovations. Seek out different lenders for the best loan terms. Loan sources include online lenders (fintech), traditional banks, and SBA loans, to name a few.
3. Business Credit Cards and Lines of Credit: Use these for short-term financing or as a rainy-day fund. Evaluate terms and conditions to ensure they align with your business needs.
4. Savings: Utilize personal or business savings for emergency expenses. Consider the risks involved.
5. Friends and Family: Especially for startup companies, personal networks might be your only source of funding apart from yourself. Ensure there is clear agreements and legal structuring to avoid conflicts when you seek funds from family and friends. Decide whether funds received are equity or loans.

Key Takeaways

1. Develop a Strong Financial Plan: Regularly track of cash balances and future projections.
2. Increase Cash Inflows: Expand payment options and optimize revenue collection methods.
3. Manage Expenses Effectively: Regularly review costs and seek cost-saving opportunities.
4. Consider Funding Options: Evaluate various funding sources to ensure positive cash flow and support business growth.

Ensuring they have adequate cash flow is one of the major challenges for businesses. Many profitable businesses have found themselves in bankruptcy because they were not collecting their receivables.

By staying focused on your cash flows and implementing some simple strategies, your business can navigate cash flow challenges, sustain operations and achieve long-term success.

As always, reach out to the Mirror Team for more information or schedule a consultation.