Business Bookkeeping Blog

When it comes to the financial management of any business, it’s often said that Cash Is King!

Whether your business is growing or struggling, managing the flow of cash in your business effectively is absolutely essential, and for many, it’s the key to business survival. You’ve probably heard the statistic that over 60% of businesses that fair is still profitable, but just ran out of cash.

If you’ve used a lot of your working capital, you may come up against a cash crunch that prevents you from paying suppliers, buying materials and even paying salaries. The time delay between the time you have to pay your suppliers the time you receive money from your customers is the problem, and the solution is “Cash Flow Management“.

That’s why it’s critical to maintain a level of working capital that allows you to make it through those crunch times and continue to operate the business. Simply put, cash flow management means delaying outlays of cash as long as possible while encouraging your customers to pay it as quickly as possible.

Before we delve into the strategies to improve & manage cash flow in your business, it is imperative to look at the basics first.

Important Cash Flow Basics
So, what is cash flow? It’s basically the movement of funds in and out of your business. Typically, businesses track cash flow either weekly, monthly or quarterly. There are essentially two kinds of cash flows:

Positive cash flow: This occurs when the cash entering into your business from sales, accounts receivable, etc. is more than the amount of the cash leaving your businesses through accounts payable, monthly expenses, employee salaries, etc.

Negative cash flow: This occurs when your outflow of cash is greater than your incoming cash. This generally means trouble for a business, but there are steps you can take to fix the negative cash flow problem and get into a positive zone. Cutting business expenses is one of the quick fixes, we’ll discuss more strategies in detail soon.

These critical numbers tell you just how much is coming in and how much is going out of your business. Making more than you’re spending? It’s all good. Is cash flow regularly edging into the negative zone? Not so good.

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.

Find Out Your Breakeven Point

You should know when your business will become profitable, not because it will affect your cash flow — because it won’t — but because it gives you an early goal to strive for and a ready-made target for projecting future cash flow. Negative cash flow and negative profits make for a grim combination. Focus your efforts on managing your cash flow with an eye toward reaching that moment when you realize your first profits.

So, gather data about our income and expenses and start doing breakeven analysis.

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?

Your bookkeeper, accountant, accounting software and even spreadsheets can help you anticipate inflows and outflows of money over a period of time. It’s important to start measuring the key metrics now.

“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”—Michael Dell, founder and CEO, Dell Technologies

If you are a start-up company and you need visibility in the flow of cash in your business, book a chat with us today!