Running a business is a difficult endeavor that involves juggling a lot of different things at once. As a business owner myself, I can attest to the challenges that small businesses face on a daily basis. In fact, I recently came across some research that stated about a third of small business owners consider cash flow as the top challenge in their business. In my personal experience, I can say that cash flow has been a top challenge at one point when my business was first starting out.
Cash flow is just that – physical flow of cash into and out of a business. Think of it like a wallet for your business. Inflows are when you receive money from customers, selling equipment you no longer need, rental income and even money you get when you take out a loan. Anytime the business gets money put in its wallet is a cash inflow. Outflows occur when the business must pay money to someone else in the form of expenses (rent, payroll, insurance, loan payments, etc.), loans made to others, purchasing new equipment or property, and issuing dividends. When a business must take money out of its wallet and give to someone else is a cash outflow.
“69% of small business owners are kept up at night with concerns about cash flow.”
– Forbes, AllBusiness
Is cash flow really that important? YES! Cash flow is the life blood of a company and can determine success or failure. Without adequate cash flow, a company can’t pay bills to vendors, meet payroll commitments or plan for future revenue and may have difficulty obtaining capital. Let’s take a more in depth look at how each of these areas can be affected by undisciplined cash flow management.
Inability to Pay Vendors
Without the cash available, suppliers can’t be paid on time and may even cease further shipments until the account is current. This can affect future value creation by restricting goods and services from key suppliers.
Can’t Meet Payroll Commitments
Employees are any organization’s greatest asset and they need to be supported. This includes being able to pay them and grant them benefits. Paying your employees should be a top priority even when cash strapped. Otherwise you risk losing key employees and reducing morale.
No Plan for Future Revenue
Not knowing when payments are coming in (or being able to reasonably estimate revenue) leaves you always in a state of uncertainty. Plotting out future revenue receipts involves estimating sales and factoring in credit terms to customers, write off amounts (for those who don’t pay – hopefully a small percentage!), and buffer for getting the money into your bank account (like the time it takes for a deposited check to clear and show up in the balance). None of these factors are complicated and can be estimated based on past performance or an average of other companies in the same industry. Failure to adequately estimate future revenues will paint a grim picture of your future cash flows and not be representative of the actual conditions.
Difficulty Obtaining Capital
With undisciplined cash flow management, there’s no telling if the money in the bank has been allocated for expenses such as payroll or rent. If a need arises where capital is needed quickly, say for an investment opportunity that could greatly improve sales, money may be used that is needed in the future, creating an unknown cash deficit.
In short, not knowing your current cash flow status or forecasting future cash flows can lead to some serious problems including having to dissolve your business. We believe that the single most important metric to track besides sales is cash flow. But how can this be done effectively?
The answer simply comes down to actively managing cash flows. Understanding the timing of your cash flows and being able to forecast them out 6-12 months will give you a picture of how your cash balance is affected and if there are any projected deficits. Knowing that you will have a negative cash flow can give you time to prepare and adjust to avoid a major issue.
We offer two key documents to help you through this to be able to manage cash flows effectively. The first is a best business practice called Effective Cash Flow Management which not only explains why cash flow issues exist, but also provides several proven ways to manage and track cash. The second is our Cash Flow Forecast worksheet where you can input cash flows and it will graph your cash balance out 12 months so you can see if there are any issues before they happen. Both of these tools are available to all members in our secured area. Access these tools and more by signing up for a membership with plans starting as low as $7.99 / month! Click below for more information.
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