Posted by News Express | 27 June 2016 | 2,907 times
From the basics, to tips on how you can improve cash flow, here is everything you need to know about cash flow management. Cash flow is one of the most critical components of success for a small or mid-sized business. Without cash, profits are meaningless.
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. 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 U.S. credit reporting agency, found that bankruptcies among the nation’s 27 million small businesses leaped by 81 percent between June 2008 and June 2009. 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 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.
The following will help you understand what cash flow is, how it impacts profits, and tips on how to improve your cash flow.
Cash Flow Basics -
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. There are essentially two kinds of cash flows:
• 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 analyse and manage your cash flow to more effectively control the inflow and outflow of cash. The SBA (Small Business Association) 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, Peachtree, etc, will help you produce a cash flow statement. There are also other websites offering free templates, including Winsmark Business Solutions and Office Depot.
Profit versus Cash Flow -
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. 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.
A positive cash flow is actually needed to generate profits. You need enough cash to pay your employees and suppliers so that you can make goods. It’s the sale of those goods that helps generate a profit. But if you don’t have the money to make the goods, you don’t end up with the profit. So you really need to structure your business to have a positive cash flow if you want your business to grow and increase profits.
Growing your business puts a huge strain on cash. You almost always have to make investments and bring certain expenses on ahead of achieving the higher revenue and cash flow that comes with successful growth. Maybe you want to open an office in a new city so you can build the business there. Or, you need to build a new facility so you have the capacity to sell to larger customers. Those scenarios (and others) require cash up front.
Please keep a date next week when we’ll discuss How to Improve Cash Flow.
Wishing you a great week.
•Lawrence Nwaodu is a small business expert and enterprise consultant, trained in the United Kingdom and the Netherlands, with an MBA in Entrepreneurship from The Management School, University of Liverpool, United Kingdom, and MSc in Finance and Financial Management Services from Rotterdam School of Management, Erasmus University Netherlands. Mr. Nwaodu is the Lead Consultant at IDEAS Exchange Consulting, Lagos. He can be reached via email@example.com (07066375847).
No comments yet. Be the first to post comment.