Back March 13, 2017

Cash Flow Management Is Not as Difficult as It Sounds

It’s been almost a year since we started talking about cash flow management and planning, which is a key aspect of financial management of a business. Planning the future cash is a requirement if you want to avoid a crisis of liquidity; forecasting is important because if a business runs out of cash and is not able to obtain new finance, it will become insolvent.

There are a lot of small and medium businesses that struggle with their cash flow management. And we totally understand why. Keeping track of your cash movements can be one tricky thing to do, especially when juggling with numbers is not really your passion.

But do not worry, statistics say that every existent business faced cash flow problems at least once in its lifetime; so you have to know that the world is not going to end and you are not the only one in this position. We’re here to help you out and get you through this.

Cash Does Not Mean Profit
There is a clear difference between cash and profit. We usually think profit, but we pay in cash. So let’s draw the line between them.
Profit: a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.
Cash: a concept which refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately; cash is seen either as a reserve for payments or, in other words, what it takes to pay the bills.

When you think of a new business, you have to see what it would cost to create the product, what you could sell or how much the amount of profit might be. The important thing is: you do not spend the profit in a business, you spend the cash. Thus, proper business planning requires managing cash as well as profits.

Maintain Cash Flow Statements
Cash flow statements are meant to track a business’s cash inflows and outflows, relating to its operations, its investments, and its financing activities. Many small and medium enterprises can choose to regularly produce statements of cash flow on quarterly or on monthly basis, being able to predict accurately how healthy their cash flow will be in the future. If you are in the position of submitting a cash flow statement, you can make the right adjustments to your business, making sure your company always has the money it needs to run.

Cut Costs
As a manager, you have to focus on the well-being of your company, which can mean cutting costs when you are able to. If you can cut back on utilities rent or payroll, do it. Lease equipment instead of buying it. Do not spend money on services you no longer need and try to renegotiate the terms of your loans and leases.

Stay on top of projections
Yes, cash flow projections are not the most pleasant thing to do as a business owner, but they can be the key to survival. Tips: be as precise as possible; always have the overview of sales, collections, and accounts receivable; be aware of accounts payable and payroll. The difference between the money coming in and going out is your projected cash flow.

Collect payments faster
One of the keys to a good cash flow management is collecting any money you have to receive as soon as possible, even if people tend to wait longer until they pay their debts. Send invoices when the work is completed or products are delivered. You can create a system which provides a discount for customers who pay earlier their bills; you can follow up by calling a certain customer who is late with his payment and so on. Get creative, let your ideas run wild.

Pay the bills on time, but not earlier
Make sure you pay your bills on time, don’t be the one who crosses the boundaries. Taking 30 or more days to pay invoices is good for cash flow, it keeps the cash in your account and out of your vendor’s until it absolutely has to be there.

Bottom line: Mind The Cash Flow
As Tim Berry has put it, mind the cash flow: profitable companies can run out of money due to lack of cash flow. There’s no way around it: To run a business, you have to mind cash flow, not just profits.
See? Managing cash flow is not as difficult as it sounds. It may seem like a burdensome activity, but if you are willing to organize your time and take it step by step, you will succeed in staying on top of your cash flow.