Cash flow has been widely heralded as the “lifeblood of business.” Jack Welch, former General Electric CEO and author stated, “If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cash flow.” Noted management guru Peter Drucker said pointedly, “Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.” Thus, it is paramount that business owners anticipate and learn about managing cash flow challenges.
What is Cash Flow
Cash flow is the flow of money in and out of a company. Positive cash flow indicates that a company has liquid assets that are increasing, allowing the company to pay its daily operating expenses, purchase inventory, pay employees, reinvest in its business, cover its current debts, and return money to shareholders.
Profit represents what is left of revenues after all expenses are deducted. It is the overall picture of a business’s health and is the basis on which a company is taxed.
A company can be profitable on paper but not have enough funds to pay its operating expenses or replenish its inventory. Cash flow challenges can prevent a company from operating.
Why is Cash Flow So Important
Positive cash flow is critical because it contributes to a stable business model. It means that cash will be on hand to fuel growth. That can include hiring additional employees and upgrading the talent pool, purchasing or upgrading equipment, expanding inventory levels, and having the flexibility to seize new opportunities or expand into new territories. It means that business financing will be more predictable. It means that securing additional financing will be more accessible.
Keeping on top of cash flow is important because that leads to a better understanding of where money is being spent. It helps a business owner and his/her leadership team make better business decisions, and it helps protect important business relationships. Cash flow challenges can undo these important markers of business success.
The Biggest Causes of Cash Flow Challenges
The biggest causes of cash flow challenges are first, not creating and consistently using a thorough budget. Second, receiving late customer/client payments and not properly managing receivables. Third, having uncontrolled growth. Fourth, not planning for and maintaining emergency funds.
As a result of these cash flow challenges, a business may experience problems paying its employees and getting the capital that it needs to thrive and grow.
14 Tips for Addressing and Managing Cash Flow Challenges
Here are 14 tips for addressing and managing cash flow challenges:
- Establish and vigorously use a comprehensive business budget.
- Invoice customers promptly to reduce days of sales outstanding and accelerate receipt of funds. Accept online payments. Also, it is a good practice to use early payment incentives.
- Extend payment as long as reasonably possible without damaging your relationship with suppliers.
- Find ways to reduce expenses.
- Identify ways to reduce waste.
- Get a business line of credit to provide readily available funding.
- Examine ways to strategically raise prices while improving the customer experience. Examine undervalued products and services and reposition them with more appropriate pricing.
- Maintain solid inventory controls. Keep inventories in line with production projections.
- Improve profit margins by securing vendor discounts.
- Develop successful processes to upsell and cross-sell.
- Be sure to pay taxes on time.
- Replace old and inefficient equipment with more efficient equipment.
- Be diligent in utilizing your financial statements to have a clear view of financial patterns so that you can move swiftly when needed. Always seek good financial advice and assistance.
Seek Professional Accounting Assistance
Contact Nolan Accounting Center, based in Greenfield, WI. We build strong relationships and support strategies for success. We provide accounting, tax preparation, bookkeeping, and payroll services to small business owners in Southeast Wisconsin including Milwaukee, Greenfield, New Berlin, Muskego, West Allis & Waukesha.