Struggling With Cash Flow in Your Business? Here’s How To Manage Your In’s And Out’s!

Just like your body requires energy to sustain itself, your business needs cash flow to stay alive and thrive in our modern business climate.

Companies have many objectives and goals to achieve in the race to stay ahead of the competition and remain relevant to their audiences. In this race, a healthy cash flow unfortunately often fails to be a key focus area.

If you’re a small business or a start-up, you’d be wise to be concerned about sustaining and staying afloat in your industry early, rather than be worried when the proverbial roof is about to cave in you.

Let’s understand how you can master cash flow management to gain a competitive advantage.

Cash Flow Defined

Cash flow is essentially the movement of money in and out of your business. What your clients pay for your products/services makes up inward cash flow. Fixed costs and production costs make up your cash outflow. If the former is higher than the latter, it gives your firm desirable positive cash flow.

The following three kinds of cash flow are concepts all businesses must reckon with in order to create a sound cash flow ecosystem:

  • Operating Cash Flow: Operating cash flow is also known as working capital. It involves funds spent on your business operations and inventory as well as the receipts from sales and services provided.
  • Investing Cash Flow: Investing cash flow is the movement of funds, inward or outward, in relation to purchasing of machinery, equipment and other assets that help in production or rendering services. Sale of such assets, not in relation to your main operations (products/service) results in inward investing cash flow.
  • Financing Cash Flow: Influx or outflux of funds in relation to capital investment in the business. This is either by way of loans, equity, shares buyback among others forms financing cash flow.

Why Is Cash Flow Management Necessary?

It really is this simple – we’re all aiming for our business to churn out more than we put into it, right? But this idea isn’t restricted to making profits alone. But profits are not the same thing as cash flow.

Often times, it isn’t the lack of capital influx but poor cash flow management and an acute liquidity crunch that forces businesses to shut shop.

Take the case of Home Depot. The American giant was neck deep in cash flow issues with $4 million per month in the negative. They had three weeks’ liquidity in hand. It took some smart cash flow management and appropriation to pull them out of bankruptcy.

Research tell us that up to 82% of small businesses failing due to common cash flow errors. And if you don’t want your company to end up as another statistic, it’s time to keep a close eye on the way you manage your cash flow.

Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most. – Peter Drucker, Management consultant, educator, and author.

Here are a few principles that will help you achieve successful cash flow management.

  • ForesightChalk out a comprehensive monthly forecast based on your operating costs, profit margins, and fixed costs. This helps you deduce what kind of sales you need to generate on a monthly basis to maintain the desired cash flow. Then, get your sales team cracking on achieving these numbers!
  • Compile Overdue PaymentsCollate amounts due to you and work on converting them to cash at hand. Remember, what you are due cannot be used to service what you owe. Minimize the practice of overdue and ensure you get them out of your books at the earliest opportunity.
  • Prolonged PaymentsWouldn’t hurt your cash flows to have ample time to deliver payables, would it? Try entering into engagements that allow you the levy of prolonged payments. This way, you can serve them when your cash flow allows you to.
  • Boost SalesA sure-fire way of pumping up your cash flow is to boost your sales – that’s what all small businesses endeavor to do. However, rather than looking at sales from a birds-eye view of a yearly profit and loss statement, change the spectrum to a monthly positive cash flow requirement to ascertain the kind of numbers you need to make to maintain cash flow sanctity.
  • Prompt InvoicingDelay in invoicing can spell delayed receivables. You don’t want to stare at notional sales proceeds that haven’t hit your bank yet. Instill a healthy practice of T/T+1 invoice cycles to realize your receivables and service your payables at the earliest.
  • Take LoansDon’t be overly concerned about taking on some short-term credit if your cash flow demands it. Remember, it is always better to get some help along the way, rather than making it harder for your path to recovery.
  • Don’t mix cash flow and profitMost managers and entrepreneurs often mistake cash flow with profits. As Chris Chocola famously said, “Balance sheets and income statements are fiction, cash flow is a reality.” Still unsure? Let’s help you get the basics right on this one.Cash flow = cash-on-hand, minus the cash you had at the start.On the other hand, profit = revenue minus expenses.The two are not the same.Only if you have a positive cash flow currently you can work towards generating a profit in the near future.
  • Embrace a lean mindsetAdopting concepts such as Just In Time (JIT) and Total Quality Management can help achieve cost optimization. Leveraging every penny in your kitty ensures there are no loose ends in your supply chain. This can help you eliminate unnecessary expenditures and keep your cash flow healthy.
  • Hire a Cash Flow GuruIf you’re having trouble ironing out cash flow concerns, its best to rope in a dedicated expert. You can get guidance on the practices in maintaining a positive cash flow over time that you cannot see from within your own organization. This expert can help shape your enterprise into a well-oiled machine from a cash flow perspective.

Here’s a quote from the hotel magnate Adam Stewart to remember: “Cash flow is having the right amount of cash in the right places at the right time, every time.”

In essence, cash flow is the lifeblood of your business that ensures that you’ll be able to sustain operations with a comfortable margin. Without a game plan or clarity on how it works, companies can inadvertently fall into cash flow mismanagement.

To ace this space, as a business, you must be aware of delayed receivables and magnified operating costs plaguing your cash flow’s sanctity. As the business leader, you need to see cash flow management as an ongoing exercise and not a one-off activity, as it is essential for overall business optimization.

If you’re facing challenges in your business, chances are, cash flow is a problem.

This means that something is wrong with your sales process and the way you’re training your team. Get clear on the 5 Steps to Train Your Sales Team in 5 Days and you’ll not only end up with some great ideas to develop your sales team but some great ways to execute those ideas.