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Cash flow. Are these words music to small business owners’ ears, or do they represent one of the most vexing and ongoing challenges small business owners face? As it turns out, the answer is both: Cash flow can help lift a business to new heights or can keep it idling in a stuck position. That’s why, for business owners, it’s so important to understand the different ways cash flow can affect your business.
In describing how cash flow affects your business plan, financial expert Eddie Lamb first boils it down to the basics:
- Starting cash
- Cash in
- Cash out
- Ending cash
This is obvious, right? If you keep a spending plan or budget, he says, these numbers are tracked for you on a weekly or monthly basis. Good cash flow management enables you to predict the state of your future finances, and daily management makes it easy. It makes creating and modifying a business plan possible. It enables you to answer the question, What will your cash balance be six months from now?
Lamb offers a few basic tips for staying on top of your cash flow:
- Immediately deposit all checks/payments when you receive them.
- Invoice frequently and change your payment terms to 15 or 30 days.
- Collect receivables within 60 days.
- Use pre-numbered cash receipts and checks for easier management.
- Pay your own accounts as slowly as you can without incurring penalties.
Tracking and knowing past, present and future cash balances is critical to having an accurate business plan. And the more planning you do, the better off you’ll be. For example, marketing planning and forecasting operating costs are two key areas that are enhanced by an understanding of cash flow. Effective marketing usually requires working months ahead before tactics are executed, which means you must know how much you have to spend and are going to have to spend in the future. Likewise, while many operating costs are fixed, you may be anticipating needing to add some temporary resources to help manage your busiest months. But, can you afford to do this? Your cash flow history and forecasts hold the answers.
Writer Russell Heubsch points out that if cash flow is the life blood that keeps businesses thriving, the stark reality is that cash flow problems can also kill businesses. He cites a 2010 Discover Small Business Watch survey that found that 50 percent of small business owners say they have cash flow problems.
While capital infusions often help cash flow temporarily, there are probably underlying problems that need to be fixed. If your business is spending more than it earns, you’ve got negative cash flow. And you’ve also got projected cash flow problems. Heubsch says that business owners often fail to really scrutinize their financial statements until the problems are too big to handle. You could be making a profit and still have negative cash flow because of the lag times between delivering products and collecting and posting payments.
Business owners need to focus on long-term solutions, which Heubsch says center around getting your products to customers more quickly. Ask them to pay in cash or by credit card; offer a discount for those who pay in less than 30 days. Stretch your own payments to the last day but don’t jeopardize your relationships with vendors.
Don’t hesitate to enlist the help of your accountant or business coach to solve your cash flow issues. In the meantime, experts say that business owners should themselves become knowledgeable in all the important aspects of analyzing and improving cash flow. If you’re like most, this means going outside your comfort zone to be able to break down and objectively examine things like your accounts receivable, your credit terms and credit policy, your inventory and your accounts payable. Click here for a terrific guide to understanding the relationship between these and other factors and your cash flow, along with steps you can take to improve yours.
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