“If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction and cash flow.” – Jack Welch
The ancient adage that “cash is king” is of particular relevance to the ongoing growth and success of any business. Therefore, it goes without saying that cash flow control and management are one of the critical elements of running a successful small- to medium-sized business. Without money, you cannot pay your suppliers and employees, buy stock, as well as pay for the various other monthly costs.
Unfortunately, despite understanding the importance of ensuring a strong and healthy cash flow, most business owners do not take the time to manage their finances appropriately. Thereby, increasing the likelihood that the company will die an untimely death.
Amy E. Knaup in her research article titled “Survival and longevity in the Business Employment Dynamics Data” noted that “it is not surprising that most of the new [businesses] disappeared within the first 2 years after their birth, and then only a smaller percentage disappeared in the subsequent 2 years.”
One of the fundamental grounds for these horrifying statistics is that one of the primary reasons why the small and medium business die a horrible death is an inadequate capital coupled with the misallocation of available funds to purchasing of non-priority assets. Therefore, the need to have a healthy cash flow in your business cannot be emphasized enough.
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What is cash flow
Before we look at ways to ensure that your business has liquid cash resources at all time, let’s look at what a formal definition of cash flow is:
Cash flow is the movement of financial resources in and out of your business. There are typically two types of cash flow: Positive and negative cash flow.
Simply stated, positive cash flow occurs when the money coming into your business from sales and other income streams is more than the amount of the cash exiting your business via monthly expenses, etc. On the other hand, negative cash flow happens when the funds leaving your company are greater than the money coming in.
Tips to manage business cash flow
Now that the importance of the need for proper cash flow management has been established, let’s look at a few ways to help you manage your business cash flow:
Take charge of your cash flow
It is vital to track every cent that flows in and out of your business on a real-time basis. This can be done using a simple spreadsheet that records income and expenditure. Additionally, it is important to analyze your income and expenses on a daily, weekly, and monthly basis.
There should be a have a list of fixed monthly expenses such as wages, office rent, water and lights, and telecommunications, etc., which will help you plan and budget for these costs. As money comes into your business via sales and other income streams, you will be able to meet these expenses.
Cultivate a positive cash flow
It stands to reason that a negative cash flow is bad for your company. Therefore, it is important to develop a business model and practical strategies that will convert your negative cash flow into a positive cash flow.
Maximize your profit
It is vital to make your capital work for you! A senior investment manager from Stern Options explains that by “investing your excess cash in low-risk investment vehicles such as fixed deposit accounts, and government bills or bonds will earn you returns that will help you counter the depreciating factor on the value of your idle cash that is caused by rising inflation.” Furthermore, this cash will be readily available should you need quick access to the funds.
The ultimate word on the cash flow conundrum is that without cash in the bank, even a profitable business on paper cannot function and runs the risk of ending up being liquidated because the cash-in and cash-out figures do not balance. Cash is indeed king. Without money, your business cannot function. Therefore, as explained above, it is absolutely critical to ensure that your company has healthy liquidity levels.
Article by Taylor Wilman