The Ins and Outs of Managing Cash Flow

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female doctor Earnings are good and profits are great - but if you don't have sufficient cash flow, your business still implodes sooner or later. If a customer is a slow pay, or if you have a huge invoice for supplies due before you have the sales to generate the cash needed to pay it, an otherwise healthy business is likely to close its doors. For good. And that's bad.

What is cash flow? Cash flow is the money that moves in and out of your business. It comes from lots of sources and is used to support business operations, expand and add value to the company. In other words, cash flow = long-term business success, and isn't that why you're IN business?
Cash in: Monies received from sales of goods and services. Money received as loans or outside investments is also considered cash in. Just keep in mind that if you extend credit to customers, while you may have made a sale, there's no cash in the drawer until payments are received and checks clear.

In other words, an account receivable - a payment owed to you by a customer - is a sale but it's not considered actual cash flow until the payment is received, deposited and the check clears.

Cash out: Cash out is money paid for salaries, supplies, inventory, expenses and other operating expenses.

Aside from salaries, the largest portion of cash out usually goes to purchase inventory. In manufacturing, for example, the purchase of raw materials, supplies and components is a big chunk of cash outflow. Payments made on loans, or to purchase assets, is also cash out.

Bottom line? Cash flow is the money flowing in and out of your business. But how do you track cash in and cash out?

Here's a simple way to determine your cash flow for a month:

Starting Cash: The amount of cash on hand at the beginning of the month. That's simple.

Cash In: All cash received from sales, receivables, interest, sales of assets, sales of stock and other sources.

Cash Out: All cash paid in salaries, expenses, supplies, to purchase inventory, and other operational expenses, from heating to postage.

Ending Cash: Add starting cash to cash in, subtract cash out, and the remainder is ending cash, and a complete picture of cash flow for 30 days.

Cash flow can be positive or negative. The objective of business is to have more cash (ending cash) at the end of each month, each quarter and each year of operation than you had over the same time frame last month, last quarter or last year. However, you may decide to invest in your business by purchasing additional inventory in anticipation of a heavy seasonal sales period.

Small and large businesses experience positive and negative cash flow over time so prepare for it and it won't sink your business when inflows are less than outflows.

Here's a simple example:

Say your starting cash for April is $10,000. You receive $9,000 in sales and $9,000 in receivables from a customer to whom you extended credit. In this case, total cash in is $18,000 for the month of April.

However, you pay $6,000 in salaries, $2,000 in expenses and $4,000 to purchase additional inventory, so total cash out the door is $12K

In this example, ending cash works out to be $16,000, with $6,000 of that total positive cash flow . Congratulations. Your business is growing!

Now, let's look at an example of negative cash flow - a nice way of saying you had a slow month or slow quarter.

Let's say a customer purchases product on credit but doesn't make a payment during April. (It happens.) That reduces cash in by $9,000. In this case, total cash in is $9K, while cash out is $12K. This month, you show a negative cash flow of $3,000, with an ending cash balance of $7,000.

Ups and downs are part of the business cycle, a good reason to set aside a cushion for those lean months, and to keep slow pays part of your customer base - knowing you'll receive payment at some point.

Any business survives, long term, on positive cash flow. Fortunately, managing cash flow isn't magic. It's not even hard to do if you follow a step-by-step process, and keep a close eye on the cash moving into and out of your business. Why? Cash flow impacts all business operations, from sales to accounting to equipment and supplies.

So, how do you track where the cash is right now?

Conduct credit checks: With every new client or customer, determine if the business or individual is credit worthy by conducting a credit check - a payment history. It costs a few bucks but may save thousands of dollars by avoiding deadbeats with a poor payment history.

Accept "fast" payment methods: Credit cards, ACH and wire transfers, and remote deposit equip your company to move receipts into your bank account faster, meaning you cover operating expenses on time to keep a squeaky clean credit record.

Manage accounts receivable: Get paid on time - or early - so cash flows more quickly. Use client relations management (CRM) software to track payments, deliveries and identify downstream cash flow problems before they become problems.

Knowing where you're going and where you'll be six months from today is essential to business planning and earnings projections you can count on.

Collect on overdue accounts: Create and follow a collection process so your company is paid on time - according to a contractual agreement. Get it in writing so you and your customers aren't faced with unexpected surprises.

Run lean: Minimize work in progress, maximize shipping and delivery times and keep as much cash as possible in your account rather than using that cash to pay for business operations. A safety net will help you sleep soundly at night.

Keep inventory low: Funds tied up in inventory can't be used for other purposes. The key is to maintain sufficient inventory - but not too much. Order inventory just before it's needed and just before it's shipped.

Pay on your terms: Pay bills on time, unless there's an incentive to pay early, like a 10% discount on inventory that's paid for on delivery. Also accept inventory on consignment or find other ways to extend payment terms to keep more cash in your business.

Overcome a cash crunch: If you do find yourself short of cash, credit lines and short-term loans from angels or venture capitalists free up the cash you need to keep moving forward to keep growing your business!

Track Cash Flow to Stay Afloat

Optimizing cash flow is simple but it shouldn't be simplistic. Track money in and money out at least weekly, if not daily depending on your business. And use CRM to track slow pays and clients who need a phone call to collect past due accounts.

Drop the deadbeats and keep your best clients and customers happy with fast turn-around of goods and services, extended credit and even discounts for early payment.

There's no way to avoid the ups and downs that are part of the business cycle but there are lots of things small business owners can do to smooth out cash flow from month to month.

Step one? Understand cash flow - where the money comes from and where it goes - using CRM and best accounting and business practices. These are the keys to keeping cash on hand and the company afloat - even if it has been a slow quarter.

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