By Carrie Emslander
What is cash flow?
Cash flow is a crucial aspect of any business, as it refers to the inflow and outflow of money. It’s the lifeblood of an organization and, if managed properly, can help ensure its long-term success. In this blog, we’ll take a closer look at what cash flow is, why it’s important, and how you can manage it effectively.
Cash flow refers to the movement of money into and out of a business. It can be divided into two categories: positive and negative. Positive cash flow occurs when a business has more money coming in than going out, which is desirable. Negative cash flow, on the other hand, occurs when a business has more money going out than coming in. This can be due to seasonality, decrease in revenue, over-extension of expenses, and more.
Why is cash flow important?
Some of the top reported reasons for small business failure are connected to cash flow management, including undercapitalization, creditor problems, and slow collection of accounts receivable.
Cash flow is important because it determines the financial health of a business. If a business has positive cash flow, it has the financial stability to cover its expenses, make investments, and grow. However, if a business has negative cash flow, it may struggle to pay its bills, meet its financial obligations, and even stay in business.
Being aware of your cash flow allows you to better reach your financial goals, adds clarity, and helps alleviate concerns around money management. This is especially true for seasonal businesses or those with large cash swings.
Being aware of aging accounts receivable gives you an opportunity to attempt collection and avoids the problem of inflated profit statements or even insolvency.
Proper cash flow management helps you make good decisions and stay afloat. With proper cash flow management, you can avoid spending more than you are bringing in by forecasting any potential shortfalls. Shortfalls can be mitigated using better timing of expense or debt payments or being prepared with a backup line of credit or loan, or requiring advance payments from customers for products or services.
Managing cash flow effectively requires a combination of forecasting, budgeting, and planning. Here are some steps you can take to manage your cash flow effectively:
- Forecast your cash flow regularly: Regularly forecasting your cash flow can help you identify potential cash flow problems and take steps to address them before they become serious.
- Monitor your expenses: Keeping a close eye on your expenses can help you identify areas where you can reduce costs, freeing up more cash for other areas of the business.
- Improve your accounts receivable process: Making sure you get paid on time can have a big impact on your cash flow. You can improve your accounts receivable process by sending invoices promptly, following up on past due accounts, and offering incentives for early payment. In some cases, requiring deposits from customers for products or services, or offering a small discount for prepayment can go a long way.
- Increase your sales: Increasing your sales is a great way to improve your cash flow. You can do this by offering promotions, expanding your customer base, and improving the customer experience.
- Plan for the future: Having a solid plan in place for the future can help you manage your cash flow more effectively. This may include setting aside money for taxes, unexpected expenses, or future investments. Companies with tighter cash flow constraints need to look at cashflow projections on a monthly and weekly basis. Sometimes even daily.
- Find a mentor. An experienced business owner may be willing to share their experience with you. Groups like Entrepreneur’s Organization (EO – for companies over $1M in revenue) and EO Accelerator (companies with revenues of $250k-$1M) are great resources.
- Another option to solve cashflow is to work with an experienced group that not only provides financing but also has years of business experience to help guide you. At Traction Capital, we provide smart capital, are an Entrepreneurial team, and love to help companies and founders grow.
Cash flow is a crucial aspect of any business and managing it effectively can help ensure its long-term success. By forecasting your cash flow regularly, monitoring your expenses, improving your accounts receivable process, increasing your sales, and planning for the future, you can help ensure that your business has the financial stability it needs to succeed.