Cash flow is the money moving in and out of your business over the course of a month. It flows in when customers buy your products or hire your services, and it flows out when you pay business expenses, like covering rent and utilities, compensating employees, or paying taxes.
When you first start a business, it’s initially difficult to get it off the ground because cash outflow from overheads usually exceeds cash inflow from sales. Consequently, your business will need some working capital from a business loan or a line of credit to cover any shortfalls.
However, once you’ve acquired a certain number of customers, you’ll no longer have to endure a modest sales volume. At that point, once you’ve tipped the scale and earn more than you spend, it’s essential to consistently work on improving your available cash flow.
Why Cash Flow Matters
When businesses fail, it’s often because of negative cash flow. With inadequate cash reserves, it’s impossible to cover operating expenses. Collapse is inevitable when you run out of money.
In credit-based businesses, negative cash flow can place a business at a disadvantage as soon as they launch. In the freight trucking business, for example, customers usually expect a 30 to 60-day credit. Consequently, a semi truck owner/operator will have to wait a month or two to get paid for the delivery they made. In the meanwhile, they will not only have to pay for delivering the freight but also have to cover all their other business operating expenses. Fortunately, freight bill factoring services help such companies rebalance their cash flow situation. What a finance company will do is buy invoices for cash and then collect directly from the customer when it’s time for the invoice to be paid.
Although a company’s success is based on its profitability, it has to be remembered that this is a big picture view, since profitability is usually assessed on a quarterly and annual basis. Cash flow, however, is the money necessary for a business to run its business operations. So, while profitability matters, it’s of the utmost importance to nurture cash flow to take care of immediate day-to-day expenses and month-to-month bills.
Improving Cash Flow
Remembering that positive cash flow helps a company stay ahead of expenses and gives it a buffer to handle any unexpected costs, here are 4 ways to prioritize cash flow management:
- Anticipate problems.
In many cases, it’s possible to predict an approaching shortfall. For instance, if sales are down, invest in some lead generation advertising to increase revenues. By taking this step, you’ll be able to stay on top of upcoming bills. This level of predictability is possible by keeping cash flow statements updated.
- Avoid being overly optimistic.
As an entrepreneur, it’s particularly difficult to resist the urge to seize every promising new business deal that shows up. Before taking the plunge, you should first check your cash flow before investing in it.
If you don’t have enough extra money, then you won’t be able to pay your expenses if the deal doesn’t work out. With every business opportunity, there are at least three things to consider: first, the idea may have an undetected downside; second, it may take some time for you to get paid; three, besides the original investment, you may have to incur some new expenses.
- Don’t spend money you haven’t yet received.
Although your P&L statement might inform you that you have extra money coming in, don’t spend the money in your bank account in advance based on the expectation that you’ll be receiving this money. An unexpected expense could wipe out your profits before you receive them.
- Avoid thinking of a positive bank balance as extra money.
If you do have surplus income in your bank account, that is, more money than you need to pay upcoming expenses, say an extra $10,000, avoid spending it on liabilities, like refurbishing the office. Instead, think of this money as an emergency fund.
In closing, when it comes to building a successful business, it’s impossible to understate the value of maintaining a positive cash flow balance. When cash flow does dip toward the negative, take some immediate steps to restore cash flow balance by either cutting unnecessary expenses or finding ways to bump up your revenues.