Business Cash Flow Management: As with most businesses (especially small businesses), cash flow is critical to ensure funds are available to meet your operating needs. Without effective cash flow management, a business faces several problem areas, such as cash shortages, inability to pay bills, bankruptcy, or even business failure.

Business Cash Flow management

Cash outflows and inflows each happen on their own cycles.  Cash inflows often lag behind cash outflows, leaving your company with a shortage of working capital. This is referred to as a “cash-flow gap.” If your cash-flow gap is too large, your cash outflow may not be covered by an inflow for weeks or even months.

Cash flow is vital for a company’s survival. It is a sign of where the company is headed. Instead of hoping everything will work out, you can enhance your cash position with Invoice Factoring from Charter Capital. With factoring, you will be able to predict and even control your cash flow which will help you achieve continued business success. Charter Capital is an alternative financing option for businesses in today’s credit-strained economy.

Calculating Cash Flow

  • Operating Cash Flow Formula  = Operating Income + Depreciation – Taxes + Change in Working Capital
  • Free Cash Flow Formula = Sales Revenue – (Operating costs + Taxes) – Required Investments in Operating Capital
  • Cash Flow Forecast Formula  = Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash

Ways Companies Can Increase Business Cash Flow

Common methods include:

  • Sell Accounts Receivable to factoring companies for instant cash.
  • Pay your suppliers slower, perhaps for an additional few weeks.
  • Reduce salaries, but supplement with stock options.
  • If you own your business property, consider selling it and leasing it back.

9 Rules of Cash Flow

Cash flow is a key issue in small business ownership. There is an old saying, “When you’re out of cash, you’re out of business.” So, a steady cash flow is essential to keeping your business up and running. However, many small businesses struggle to maintain a positive cash flow, which leads to a number of challenges. Cash flow basics can help you to avoid money worries. These nine simple rules can help you to take control of your cash flow and make your business more successful.

  1. Cash Is King. It’s important to recognize that cash is what keeps your business alive. Manage it with great care because it is the lifeblood of your business.
  2. Never Run Out of Cash. Make a commitment to do what it takes to maintain cash flow. If you don’t, you’re out of business.
  3. Know Your Cash Balance. Do you know what your cash balance is right now? You should. It’s absolutely critical that you always know your exact cash balance. Failure is inevitable if you are making business decisions based on incomplete or inaccurate information.
  4. Don’t Wait for Tomorrow. In other words, do today’s work today. The key to knowing your cash balance is to have up-to-date information in your accounting system. Having the numbers you need when you need them is critical.
  5. Invoice Immediately. You can’t have cash in the bank until you collect it. If there is a delay in sending out your invoices, there will be an equal delay in receiving cash. Invoice daily if you can.
  6. Never Manage From your Bank Account Balance. Your bank balance does not represent your actual cash. There are two things that you should know: the cash in your bank account is not the same as your actual cash balance. You shouldn’t confuse them. It is dangerous to try and manage your cash flow through your bank account.
  7. Forecast Your Cash Flow. What is your cash balance going to be like in six months? Knowing this can tell you if you are managing your business or if your business is managing you. Predicting your cash balance in the future will give you the critical information you need to successfully manage your cash flow today. Be proactive in your approach to cash management.
  8. Cash Flow Issues Don’t Just Happen. It’s amazing to see how many small businesses fail due to cash flow problems that the owners didn’t notice. Like any other problem, there are always signs long before cash flow problems appear. Regularly reviewing your cash flow forecast will help you prepare for a cash crisis.
  9. Get Expert Advice. Not all business owners are comfortable with calculating projections or conducting a trend analysis. Many times they just don’t have the time. Bookkeepers, although capable, may not provide the insightful knowledge that a seasoned professional may. Wrong information can lead to wrong decisions. Have an expert (a CPA or Financial Analyst) review your accounts to help you make the best decisions you can make for your business. It is well worth the investment.

Taking a focused and pragmatic approach to managing your cash will allow you to ultimately focus on what you want most…growing your business. That’s a recipe for success.

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