Cash flow is a measurement of the amount of cash that comes into and out of your business in a particular period of time. When you have positive cash flow, you have more cash coming into your business than you have leaving it—so you can pay your bills and cover other expenses. When you have negative cash flow, you can’t afford to make those payments.
Profit does not equal to good cash flow
You can’t just look at your profit and loss statement (P&L) and get a grip on your cash flow. Many other financial figures feed into factoring your cash flow, including accounts receivable, inventory, accounts payable, capital expenditures, and taxation.
Effective cash-flow management requires a laser focus on each of these drivers of cash, in addition to your profit or loss. Rules of accounting define Profit simply as revenue minus expenses. However, a smart business owner understand the fact that whether you earned a profit is not the same as knowing what happened to your cash.
Why does cash flow matter?
There’s a famous saying in business: “Revenue is vanity, profit is sanity, cash is reality.”
Simply put, financial management begins and ends with cash. If you don’t actually have cash on hand for your business needs, you start hitting blockers in your operations. Learning to manage cash flow is a foundational building block for managing your business finances. If you’ve got that down, then you can start thinking about how to really grow your business and improve your margins and profit.
How does managing your cash flow affect your future?
Cash flow management is vital to your business’s success. If you can accurately project cash flow, you will steer your company in the right direction. If you understand cash flow techniques, you can get ahead of the market. You’ll even be able to predict cash flow, because you understand the revenue cycles of customers, vendors, suppliers and contractors.
Every business has high and low seasons; understanding upcoming expenses for employee overtime, replacement equipment and other needs goes a long way to ensure your business is well positioned to handle any bump in the road. The first step is to determine the cash flow your business needs.
You Can’t Control What You Don’t Measure
Finding out the amount of working capital a business needs to operate is the first step. You need to answer questions like:
- How much inventory do I need to hold?
- How many invoices are overdue?
- How much cash is tied up in work in progress?
- How long does it take from paying our suppliers for the materials to extracting cash from the customers?
Five ways for managing your cash flow
1. Keep your books accurate and up to date
Your cash flow is only as good as your accounting and reporting. Don't let this get out of hand. Make sure your accounting information is updated regularly. Then you can see the financial state of your business at a glance.
2. Collect your receivables quickly
Keep a close watch on your accounts receivable turnover at all times. If it’s trending up, it might be time to step up your efforts at chasing payment. As receivables age, their quality goes down, so you should act sooner rather than later.
3. Invest in a good accounting system
Your decision are good as your numbers. If you’re not confident with numbers, hire a professional accountant. Use quality accounting software, so you always know your cash position. It will also help you forecast your cash flow for planning purposes. What’s more, a reliable accounting system will help you track and report on key business metrics. These include accounts receivables aging, operating margins and inventory turnover. Having a good handle on these business metrics will help you manage your cash like a pro – and take advantage of new opportunities.
4. Increase your sales.
One foolproof way to improve cash flow is to increase your sales. A small profit loss per sale is easily offset with an increase in overall sales. Consider offering promotions and discounts. You can also increase sales by improving your marketing strategy, but this will often require a bigger marketing budget, which will take away from your cash flow. You’ll need to determine if the expected increase in sales is worthwhile.
5. Build a cash reserve
Access to cash will make or break your business. The ultimate step to managing cash flow like a pro is to build a cash reserve. A cash reserve provides the cushion you need to manage unexpected events. It can insulate you from the economic cycle and the whims of banks and other lenders. It will also let you take advantage of opportunities when they present themselves. It also gives you the confidence and finances you need to grow your business. Building a cash reserve puts you in a position of strength. It might mean paying yourself a little less in the short term, but in the long term it will put your business on the path to success. That ultimately means more money in your pocket.
How Finlanza can help
Getting a handle on your finances can mean the difference between being cash-strapped and having the funds to thrive. But before you can understand your cash flow, you’ll need to get your financial reporting up-to-date.
At Finlanza, you’ll get more than basic accounting and bookkeeping services. We provide a dedicated team that knows the ins and outs of your business’s finances, then pair their expertise with innovative tools, tried and tested processes. Our comprehensive financial services model allows you to take control of your business’s financial health, without all the stress and frustration.
With Finlanza, you get expertise, tech, and custom solutions that support your business’s financial success. You focus on building your company, we keep you updated on your financial performance, cashflow, and manage the day to day operations.