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The Kiss of Death for Small Business Owners – Not Managing Cash Flow

Cash Flow Management

There is an old saying…”Cash is King.” That saying is no more true than for a small business owner. Many businesses have failed, not because they didn’t have a great business concept or the owners did not work hard enough. Often they failed for one simple reason: they failed to plan their cash flow. It boils down to a lack of understanding of some basic accounting principles.  As the business owner, it is your responsibility to understand those basic accounting principles in order to better manage your cash flow.

Cash on hand is the lifeblood of any business. That can either be cash on hand or money in a business bank account that is available to meet obligations. Adequate cash flow includes paying bills, an emergency cash cushion for unplanned expenses and enough left over for investment capital.

Understanding Your Operating Cycle

Every business has a different operating cycle which may begin with the purchase of inventory and end with the collection of accounts receivable. The operating cycle of any business is merely the measurement of the flow of assets into cash. If you sell a product or products your operating cycle may begin with both cash and inventory on hand. Often additional inventory is purchased on account to make sure there is enough stock on hand to deliver to customers when ordered. Your sales may consist of cash and accounts receivable-credit sales. Most often accounts receivable are usually paid 30 days after the original purchase date. When you pay your vendor for your inventory, both cash and accounts payable are reduce. Thirty days after the sale of your stock, receivables are usually collected which increases your cash. At that point your cash has completed the journey through the operating cycle and is ready to begin again.

If you are in the service business, often you provide the service which often incurs a labor cost, but the client may not pay for 30 days. You must manager that gap in the cash flow. By looking at your cash flow on a monthly basis, you can eliminate both deficits and surpluses and compare them to past months. If you find you are cash deficient, you must find new ways to increase the cash to the bottom line. If you have an excess of cash, you many not be investing properly or you may be borrowing more than you need. Managing cash flow is managing that balance.

What Can I Do to Improve the Cash Flow in My Business?

Great question! If you have identified a shortage of cash, this is time for action; but not mindless action. You need a solid plan to increase your cash reserves. It could be done in the following ways:

Pricing Your Product Right: Making sure you have priced your product or service correctly is absolutely essential to business success. How did you set those prices? What are all the costs associated with that product or service? How did you set those prices? What are all the costs associated with that product or service? Have you taken ALL of your costs into account, including fixed administrative costs that must be covered every month? What is your competition doing? All of these factors and more must be looked at on a regular basis and adjusted accordingly.

Timely Collection of What You are Owed: You must actively manage your accounts receivable. Do you have a process to collect overdue accounts quickly? Are you giving money away because your collection polices are not aggressive enough? If you are a service provider, are you billing immediately after the service is provided or are you asking for a retainer for services upfront?

Tightening Credit Requirements: Depending on your business model, if credit and terms become tougher, more customers must pay cash for their purchases. For you that means increasing the cash on hand and reducing your bad-debt expense. Be aware that tightening credit can be helpful in the short term, but it may not be beneficial for the long run. You must always balance collecting cash with making it as easy as possible for customers to buy your products or services.

Take Out Short-Term Loans: It may be advantageous to secure a revolving credit line or equity loan to access when short-term cash-flow problems occur.

Increase Sales: Increased sales should increase cash flow. However, if large portions of your sales are made on credit the opposite can occur. In that case your accounts receivable increase, not your cash. Another issue is that your inventory is depleted and must be replaced. If receivables are not collected until 30 days after sales, you may find that the substantial increase in sales can quickly deplete your cash reserves.

The key is to review your cash flow analysis on a regular basis and determine what options will bring you the BEST RESULTS.

We Can Help…

If you want more control over your business and your cash flow, give us a call at 303.945.2104 or fill out the contact form below and start bringing balance back into your business. Because we can remotely serve you in most cases your business does not have to be in the Denver area.

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