The Importance of Business Cash Flow Management
As with most businesses (especially small business), 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.
Cash outflows and inflows each happen on their own cycles. Many times, cash inflows lag behind cash outflows, leaving your business short of money. This is known as a “cash flow gap.” With a large gap of this nature, your outflow of cash may not be covered by a cash inflow for weeks or months.
Cash flow is one of the most vital elements in the survival of a business. It shows where a company may be headed. Instead of hoping everything will work out, you can enhance your cash position with Invoice Factoring from Charter Capital. When you can predict or even control your cash flow, you are in a much better position for continued business success. In today’s credit strained economy, Charter Capital is your alternative business financing solution.
Ways Companies Can Increase Cash Flow for their Business
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
There is an old saying: “When you’re out of cash, you’re out of business.” However cash flow can be one of the most difficult challenges when running a small business. Knowing some basic rules of cash flow can help to free you from money worries. These nine basic rules will help you take control of your cash flow so you can enable your business to succeed.
- 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.
- 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.
- 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.
- Daily on a Daily Basis. 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.
- 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.
- Never Manage From your Bank Account Balance. Your bank balance is never a true measure of your cash. The cash in your bank account and your real cash balance are two different things. Don’t make the mistake of confusing them. Attempting to mange cash flow from your bank account is a prescription for failure.
- 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 into the future will give you critical information you need to successfully manage your cash flow today. Be proactive in your approach to cash management.
- Cash Flow Issues Don’t Just Happen. It is amazing how many small businesses fail because the owner didn’t recognize that they had a cash flow problem in time to do something about it. Just like any other problem, there are always signs well before cash flow issues appear. Reviewing your cash flow forecast on a regular basis will help you to prepare well in advance of having a real cash problem.
- 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.