Master of Your Dollar — Understanding Your Business's Cash Flow

It’s an age-old saying that cash is king, and when it comes to running a successful business, it proves itself time and time again. Without proper cash flow, your profits mean nothing.

Your company’s inability to manage your cash could land you in a predicament when you can’t make the investments needed to go toe-to-toe with your competition, or worse — bankruptcy. Being successful on paper isn’t enough. 

Cash flow problems are one of the leading causes of why businesses take a nosedive. Avoid becoming a part of that statistic. Learn the cash flow basics and ins and outs of managing money so your company has the funds to keep the engine running.

Cash Flow 101

Not sure what cash flow is exactly? To put it plainly, it’s how money moves in and out of your business. You’re doing a disservice to your company if you’re not tracking this. If not weekly, then monthly.

• Positive cash flow is when the cash coming in, whether from sales, payment collection, etc., is more than the cash that is leaving your business due to covering monthly expenses, employee salaries, and the like.
• Negative cash flow occurs when your outflow is steamrolling your incoming cash. This is a red flag for trouble ahead.

Businesses don’t land in a positive cash flow by luck. It comes with taking the time to analyze and manage where their cash is going and coming from.

A cash flow analysis will help shine a light on if your company has the funds to cover the next month. If you’re experiencing negative cash flow, consider conducting an analysis weekly rather than monthly until you see positive cash flow.

Profit Doesn’t Equal Cash Flow

If you thought looking at your profit and loss was enough information to deal with your cash flow issues head-on, you’re in for a rude awakening.

Additional financial factors in cash flow

• Accounts receivable
• Accounts payable
• Inventory 
• Capital expenditures
• Operating expenditures
• Debt services

You may know if you’ve earned a profit, but you may not see what happened to your cash. While profit is your revenue minus expenses, that doesn’t create the cash.

When you invoice your customer, it creates revenue, which can trigger a profit, but only when you’re not touching cash until you collect payment. 

Having a positive cash flow is essential in generating profits. How else will you have enough funds to pay employees and suppliers to keep the goods and services rolling? It’s key to structure your business to have positive cash flow in order to see continued growth.

Fix Your Cash Flow

Have you witnessed a fellow business owner make a large investment purchase on the idea that it will help pull them out of the red? Perhaps you’ve done something similar. While growing your business seems like the solution, you want to avoid accidentally increasing your cash flow problem.

Take rational steps to better manage your cash flow for the sake of growth.

Tip 1: Collect receivables quicker

Collecting cash is a must when working toward positive cash flow, so speed up the process. Turn approved estimates into paperless invoices customers can receive as soon as their service has been received.

Make it easy by offering online payments or send payable invoice links to your customers via SMS so they can pay on the go.

You don’t have time to waste chasing unpaid invoices. Take advantage of your CRM’s automated payment reminder feature and let technology do the work.

Related topic: Master Payment Etiquette and Collect Payments like a Boss

Tip 2: Increase your sales.

Before you start blowing bucks on attracting new customers with ads, take a second to think. We know new customers are vital to business growth, but work smarter, not harder.

It takes time and money to draw in new customers and, if we’re being honest, the goal is to help you save both. Your current customers are a great tool so use them.

Think beyond the standard “they will tell their friends about your product” idea. We’re talking big picture. Analyze what they’re buying and why.

Take that information and use it to sell even more. For a local spa, you may see that manicures are upward of 80% of your daily services. Consider offering a variety of manicures using time-based add-ons at a higher price.

This will help increase your profit margin and also, hopefully, bring in more cash. Beware of increasing your sales if they will be made on credit. This will only result in higher accounts receivable instead of actual cash.

Finding new customers is 5 times more expensive than retaining old customers.

Tip 3: Time-related discount incentive

If your accounts receivable number is high, an option to get paid and increase your cash is to reward customers who pay early with discounts. Incentives work.

People pay on time to avoid late fees so it’s safe to say you should notice an upward tick of early payments and (fingers crossed) a shift toward positive cash flow.

It’s also worth checking to see if your suppliers offer early payment incentives as well to help decrease your outflow of money. Of course, refer back to your cash flow statement to determine if you can afford to make those early payments at that time.

Build Your Cash Flow Statement

If you don’t have a handle on your cash flow, then you can start by asking two questions:

1. What is my cash balance right now?
2. What do I expect it to be in six months?

In order to see the success you desire, you need a plan but you also need to know where you stand. This is where building a statement comes into play.

By creating a cash flow statement, you’ll be able to reference what’s happened to your cash for any specific time frame. When building out your statement, it’s important to note that there are three different cash flow categories.

• Operation cash is money that moves in and out, related to the business
• Investment cash is money that moves in and out, due to gains or losses while investing
• Financing cash is money that moves in and out, due to loans or lines of credit

Refer back to your cash flow statement as often as you need it. During the holiday season, managing cash may look a little different so be sure to plan ahead to stay afloat.