Cash Flow Management

According to a survey released May 8, 2012 by the Kauffman Foundation, a Kansas City, Mo., research organization focused on entrepreneurship, more entrepreneurs are concerned about slow paying customers.  In 2008, only 2% of small business owners said getting paid was their most challenging problem but that figure jumped to 14% in 2010.

A solid, healthy and reliable cash flow is needed by all business, large and small.  Businesses can operate with a loss on the Income Statement but can’t continue for long without positive cash flow.

Simply stated, cash flow is the movement of money in and out of your business.

The cycle starts when your business uses cash to provide goods or services to your clients / customers who then pay you for said goods or services completing the cycle.  You then start the cycle all over again.

Although it’s important to know what goes in and out of your checking account, understanding your cash flow is more than just that. 

Keep Your Cash Inflows Flowing

Cash inflows are the movement of money into your business and are typically from the sale of  goods or services to your customers. If you extend credit to your customers, then an inflow occurs as you collect on the customers’ accounts.

Other types of cash inflows could be:

  • Proceeds from a bank loan
  • Sale of stock / portion of the business / bring in a new investor/partner
  • Scrap material from a manufacturing process
  • Sale of excess / unused fixed assets (i.e. delivery truck that is no longer used)

Delaying Outflows as Long as Possible

Outflows are the movement of cash out of your business. Outflows are typically the result of paying expenses. If your business involves reselling goods, then your largest outflow is most likely to be for the purchase of retail inventory.  A manufacturing business’s largest outflows will mostly likely be for the purchases of raw materials and other components needed in the manufacturing process.

Other types of cash outflows could be:

  • Payment of Rent / Mortgage
  • Loan Payments
  • Salaries & Benefits
  • Purchase of materials to be used in a manufacturing process
  • Purchase of Fixed Assets & Equipment
  • Payment of Utilities, Office & Other Supplies, etc.

Why Managing Your Cash Flow Matters

Optimizing and managing your cash flow is crucial because:

  • Smart cash flow management is vital to the health of your business. Hopefully, each time through the cycle, a little more money is put back into the cash flow cycle than flows out.
  • Profit on your Income Statement is not the same as your cash flow. It is possible to show a healthy profit at the end of the year but show a decline in cash flow due to acquisitions, purchases of fixed assets, etc.

Final Thoughts

Positive Cash Flow is critical to the health of any business.

Improving your cash flow will make your business more successful. Accelerating your cash inflows and delaying your cash outflows are key factors for improving and managing your cash flow. Setting up and following a cash flow budget is useful in managing and improving your cash flow.

From time to time, almost every business experiences the need for more cash. If you find yourself in this position, you may have to borrow money to fill the gap.  Some suggestions could include:

  • Line of Credit
  • Factoring of Accounts Receivable
  • If you make a lot of sales on credit cards, change to a processor that not only charges less per transaction but also funds the charges quicker
  • Utilize a service that manages and assists in the collection of your Accounts Receivable

Handling a Cash Surplus is just as important as the management of money into and out of your cash flow cycle. With the proper management of your cash flow, you might find yourself with a little extra cash, on which you can earn investment income, pay debt, expand, etc.

As a B2B CFO® Partner, I can help guide you through the Cash Flow process. Please contact me by e-mail or by phone at 704/651-2216.

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