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Casualties of Cash Flow

The importance of Cash Flow can be summarized by the common expression "Cash is King".  While having cash on hand is critical, cash flow demonstrates your ability to sustain an ongoing cash stream.  Whether you are a start-up or a multi-million dollar global entity, if you don't understand, forecast, and analyze cash flow, you are destined to become a casualty.  In fact, 70% of businesses that fail are profitable when they close their doors.  They just don't have a positive cash flow to cover operating costs.

Here are some points to consider when developing your cash flow statement:

  1. Accounts Receivable:  Tracking the aging of your A/R is a best business practice.  There is a strong tendency to manage companies from the bottom line.  However, profits don't pay the bills, positive cash flow is required.  If you aren't collecting from your customers, you will not have the cash to pay operating costs.  To take this a step further - if you generate an increase in sales, you will most likely increase operating costs.  Be decisive about the terms you extend to your customers, and then hold them to it.  Establish payment terms and late penalty fees.  Be proactive otherwise you could be in for a rocky ride.
  2. Accounts Payable:  It is an ideal scenario to be collecting money at a faster rate than you pay out money to your vendors.  When possible, it's a good idea to review the option of utilizing a business credit card for purchases.  This may allow you to extend your payment terms and also enjoy other perks such as travel rewards and/or points.  I also recommend negotiating with your vendors on payment terms, discounts, prices, etc.
  3. Seasonal:  If your business is affected by seasonality, cash flow should be a top priority.  While you may be enjoying profits at the end of a peak season, you need to ensure the cash flow will carry you through the droughts.
  4. Line of Credit:  This may be a viable option to even out the ebbs and flows of your cash stream.  A line of credit is a standard service provided my many banks and is an option worth exploring to keep you from being a casualty of cash flow.

 

 

 

Lynda Steinbeck