Understanding and Managing Your Operation Cash Flow
Lack of cash coming into your business can be the cause of many sleepless nights; it can stagnate your business and even cause it to fail if you don't have the right resources in place to keep it moving. However, having a strong understanding of your business' operational cash flow can help you plan and manage your financial needs.
Driven by the passion and the excitement of finally launching the business of their dreams, many small-business owners dive in without a thorough understanding of what it takes when it comes to cash inflow and outflow.
Following some simple steps to manage your cash flow might help your business run more efficiently and effectively. It also means you can adapt to unexpected expenses, reinvest capital to increase company growth, and improve your chances of securing funding from lenders.
What is Cash Flow?
Cash flow is essentially the money that comes into your business including your beginning cash or bank balances plus any petty cash on hand; interest earned from bank accounts and investments; even business loans or lines of credit are considered as part of your cash flow. When venture capitalists invest in your business or company, these amounts are also included in your cash receipts.
However, sales — and the results of sales, your account receivables — play the most important role in your cash flow. Without customers wanting to buy your products or services, no matter how much initial capital, loans, or investors, your business will not survive.
It is important to remember that your cash flow is very different from your profit. Profit is what you have left at the end of the month or the year after all your business expenses have been covered whereas your cash flow is the money you have at any given time to keep your business in good standing.
So here are 3 simple steps to help you manage your cash flow:
Step 1: Determine your Cash Flow Cycle
Your cash flow cycle is determined by the amount of time it takes to buy parts or supplies, create or manufacture, and sell and receive payment for your products or services. It essentially defines how long it takes to generate cash from your daily activities.
The shorter the cash flow cycle of your business, the more money you will have on hand to pay expenses and payables and start the cycle once again. If you have frequent cash flow cycles, you're technically more efficient as a business because you can quickly gain a return on your operations.
Step 2: Try to Increase the Cash you Generate Per Cycle
If your cash isn't tied up elsewhere, then the cash gained from your sales allows you to generate a positive cash flow in every business cycle. To generate more cash per cycle, you can try to increase your sales, generate larger profit margins, or reduce expenses and salaries — if possible — on each cycle. Or, try to speed up your process to generate more cash flow cycles per year.
Step 3: Ensure your Process Gives you Extra Time and Resources
It is said that a small-business owner "is" the business. Nobody can talk and promote your business with the conviction and the passion that you do. If you spend all your time trying to generate cash in each cycle — applying for financing or loans or looking for investors — you're missing out on generating more sales, promoting or advertising your business, networking, and being out in the community attracting customers that will potentially bring additional revenues.
Why you Need to Manage your Cash Flow
In addition to keeping your business afloat, managing your cash flow can also help you take control of other important situations:
- Managing unexpected expenses – As a small business, day-to-day operations are often unpredictable and your resources might be limited. You can plan for expected overheads such as rent or utilities, supplies, and salaries, but the loss of a repeat customer or a sudden broken piece of important equipment can throw your business off balance.
- Keeping control of your business – When your business isn't performing as planned, it can feel as if you're descending into chaos. Managing your cash flow gives you more control and perspective of your business and helps you make important decisions to change the course of action, innovate, bring new products or services, or expand into new markets.
- Applying for loans – Bankers, lenders and investors usually analyze cash inflow related to operating activities in order to make a decision about investing and financing your activities.
- Funding expansion and growth – A positive cash flow also allows you to reinvest and expand, so that you can increase your profits and customer base.
Cash flow is an important part of the financial health of your business. The more liquid your cash flow, the better prepared you are to face your business ups and downs. Following the steps above, you can help ensure your business is managed effectively and efficiently.