What Does Cash Flow Mean for Your Business?

How you manage your cash flow is an indicator of how successful your business is doing. In the ideal world, you pay your bills with cash generated from your business, not from debt. Of course, this can’t happen unless you are making a profit, and truth be told, you want to be making enough cash to cover expenses for at least 90 days. If that’s not happening, you need to take the following steps to better track the money coming in and going out of your company if you want it to grow.

• Project cash flow. A seasoned business owner will prepare cash flow projections for different times of the year. Cash flow projections are based on how fast money is coming in and going out. Factors include your customers’ payment histories, your vendors’ invoicing practices, your interest earnings, salaries and wages, service fees, seasonal sales fluctuations, loan payments, advertising, taxes, and operating expenses such as equipment maintenance, utilities, rent, etc. Accurate projections can alert you to trouble well in advance. It gives you time to develop a plan. It is wise to maintain a reserve separate from your daily operations. A good rule of thumb is to have at least 45 days of expense reserves. This shows the financial institution you’re planning and being proactive.
• Expedite receivables. We all want to get paid faster -- on time at the very least. One way to speed this process up is by turning your product/service over sooner than predicted. Other tips include asking customers to make deposits when placing an order, issuing invoices promptly and following up quickly if payments are slow coming in, and offering discounts to customers who pay for everything upfront. The quicker you can turn your product into cash, the easier you can manage your payables. Consider software that will help you manage your accounts receivable more effectively. This will help you maintain your monthly cash flow and decrease the likelihood of having to write off bad debt in the long run.
• Stay on top of payables. Watching expenses carefully is an everyday practice for a growing business. Any time you notice expenses exceeding sales, it’s time to zone in on where you can cut or reduce costs. Examine all aspects of the business. Shop around with vendors for better pricing, discounts, or more flexible payment terms. Schedule your payments to be made on the last day with electronic funds transfer. That allows you to retain funds longer while still remaining current. Consider reducing staff or at least staff hours if business is slow. Ultimately, you want to hold on to your cash as long as possible while having it flow in faster.
• Predict short falls. If your projections show trouble ahead, it’s better to approach your financial institution now to request assistance. By doing so, you show you have a plan. Financial institutions prefer to lend to you before you need it. If you wait until trouble strikes, it shows you failed to plan, and they will be more hesitant to lend to you. Getting ahead of it allows you to arrange a line of credit that you can withdraw from as needed, so you never are short on cash.

Every business experiences a lull in cash flow. It’s how you manage that lull that will determine your success. Be sure to understand your cash-flow statement, balance sheet, and income statement thoroughly to maximize any cash-flow potential or profit fully.