From the basics, to tips on how you can improve it, here is everything you need to know about cash flow management.
There’s an old adage about business that «cash is king» and, if that’s so, then cash flow is the blood that keeps the heart of the kingdom pumping. Cash flow is one of the most critical components of success for a small or mid-sized business. Without cash, profits are meaningless. Many a profitable business on paper has ended up in bankruptcy because the amount of cash coming in doesn’t compare with the amount of cash going out. Firms that don’t exercise good cash management may not be able to make the investments needed to compete, or they may have to pay more to borrow money to function.
«Despite the fact that cash is the lifeblood of a business — the fuel that keeps the engine running — most business owners don’t truly have a handle on their cash flow,» says Philip Campbell, a CPA and former chief financial officer in several companies and author of Never Run Out of Cash (Grow & Succeed Publishing 2004). «Poor cash-flow management is causing more business failures today than ever before.»
Academic studies over the years have found that cash flow problems can be one of the leading causes of failure for businesses. A study reported in August from Equifax, the credit reporting agency, found that bankruptcies among the nation’s 27 million small businesses leaped by 81 percent between . While the U.S. Small Business Administration (SBA) estimates that about 600,000 new small businesses are launched each year, a 2007 study reported in the U.S. Bureau of Labor Statistics’ Monthly Labor Review indicates that two-thirds will only survive two years, 44 percent survive four years, and 31 percent survive for at use this weblink least seven years. Scholars have found over the years that insufficient capital is one of the main reasons for small business failure, coupled with lack of experience, poor location, poor inventory management and over-investment in fixed assets, according to the SBA.
How To Manage Cash Flow
The following pages will help you understand what cash flow is, how it impacts profits, and tips on how to improve your cash flow.
What is cash flow? It’s basically the movement of funds in and out of your business. You should be tracking this either weekly, monthly or quarterly.
• Positive cash flow: This occurs when the cash funneling into your business from sales, accounts receivable, etc. is more than the amount of the cash leaving your businesses through accounts payable, monthly expenses, salaries, etc.
• Negative cash flow: This occurs when your outflow of cash is greater than your incoming cash. This generally spells trouble for a business, but there are steps you can take to remedy the situation and generate or collect more cash while maintaining or cutting expenses.
Achieving a positive cash flow does not come by chance. You have to work at it. You need to analyze and manage your cash flow to more effectively control the inflow and outflow of cash. The SBA recommends undertaking cash flow analysis to make sure you have enough cash each month to cover your obligations in the coming month. The SBA has a free cash flow worksheet you can use. In addition, most accounting software packages geared to small or mid-sized businesses – such as Quickbooks will help you produce a cash flow statement. There are also other websites offering free templates, including Winsmark Business Solutions and Office Depot.
Profit does not equal cash flow. You can’t just look at your profit and loss statement (P&L) and get a grip on your cash flow. Many other financial figures feed into factoring your cash flow, including accounts receivable, inventory, accounts payable, capital expenditures, and debt service. Smart cash-flow management requires a laser focus on each of these drivers of cash, in addition to your profit or loss. «There is a secret that very few business owners have discovered (and the accounting community has not done a good job revealing): knowing whether you earned a profit (or created a loss) is not the same as knowing what happened to your cash,» Campbell says. «Profit, as defined by the rules of accounting, is simply revenue minus expenses. Invoicing a customer for products or services you sold to them creates revenue. Actually collecting the money on that invoice is what creates cash.»