Is your business struggling with cash flow? Unfortunately you are not alone. Many businesses of all sizes, industries and duration of existence struggle with cash flow. I wish I could tell you there was a magic pill, but there isn’t. Though there are some good fundamental business choices you can make a long the way to keep your cash flow positive. Cash is KING! Without it, your business will not survive.
Here are some key points I frequently discuss with my clients to help them when they are struggling with cash flow and staying in the black vs the red.
1. Understand the difference between cash and profit. You may be profitable, but if you are not having a positive cash flow from operations long term then your business will not survive. There are three main ways your business has cash coming in: Operations, Investments and Financing. While there are times you will borrow money from the owners or outside lenders, long term that is not a sustainable way to keep your business operating. Your business must sell the products or services it is in business to provide and you must have enough cash left over from your profit to cover debt payments and owner draws etc so that you cash flow positive on a regular basis. Every business has cycles and their share of ups and downs, so while you shouldn’t be alarmed that you may have a month or two of negative cash flow, long periods of negative cash flow may be a strong indication of issues for your business.
2. Save for a rainy day. While I know we are a society of living paycheck to paycheck; which does include businesses — they often live from one sale to the next. It is not a healthy way to survive long term. If your business is spending every dollar it makes, then it has no rainy day fund. You will find lots of advice on how much you should put in that rainy day fund — most recommendations are for 6 to 12 months of expenses with the approach that more is better. This will help you when you do have a month or two of struggles that you have some reserve to fall back on. During times of great excess then you should set more aside. This can be used for asset purchases and growth of the company as well so that you are not having to always borrow from outside sources.
3. Have an Accounts Receivable and Accounts Payable System. Whether you use a product like QuickBooks or any other computerized accounting system, you need to understand how to properly use your tools and follow through with a process. What terms do you give your clients for paying you? What are the payment terms you have with your vendors? Managing these areas well can make or break your business cash flow.
4. Know your numbers. I am amazed that all too frequently business owners and managers don’t know their numbers. They don’t know what their gross profit margin and net profit margin are or their inventory turnover etc. It’s not just the accountant’s job to know this. Managers and owners need to understand it as well. If you don’t know yours…then find out. You have to know how much you are spending and how much you are making to really be able to make good business choices. What is your ROA (return on assets)? The only reason a business should spend money is to make money. Not for the fancy cars or latest new equipment — those dollars spent should be providing a return of $$ to the company.
5. Change is constant. No industry is without impact of change. It is the only given in business — you must be constantly changing, improving, innovating to stay ahead of the competition. What do you offer that is better than your competitors? Why should I do business with you? Do not become complacent — be prepared and on the forefront of the change in your industry.
I could go on and on with tips, but I believe these are 5 of the top areas you need to be aware of to manage your cash flow in a positive manner. Need help with these areas? Reach out to a professional to help you learn about any areas that you are unfamiliar with. Your business will thank you!