One of the most telling indicators of a successful business or HOA is its smooth cash flow system
Every company, regardless of industry or production, must deal with the realities of financial management. When leadership understands the fundamentals of cash flow, business tends to run smoothly. But leaders who Ignore those principles can quickly get bogged down in accounting and financing minutiae.
Cash flow can look different for every business at different stages of its growth and annual cycle, but the core principles remain consistent. If you are having a hard time keeping your cash flow system on track, or don’t have a system to speak of, then it’s time to take control of your balances. Here’s a primer on what that means, and how to get started.
What is cash flow?
Simply put, cash flow refers to the movement of money in and out of a business each month. Money flows in from sales and flows out to cover expenses and operating costs. This financial ebb and flow keeps products in production, offerings consistent, staff employed, and operations running.
It can feel like cash flows mostly in one direction — out. Businesses may watch cash leave a little too quickly as they pay rent, loan payments, taxes, accounts payable, etc. While this can be discouraging, that cash flows both ways. If a business is struggling to keep the flow even, then it needs to work out a system to create the right balance.
Why small businesses must pay attention to cash flow
Cash flow issues are a huge threat to small businesses and the main factor behind 82 percent of their failures. That’s why even small businesses must implement a system for managing cash flow. Pay attention to the money moving in and out of your business, because it’s entirely possible for a small firm to be profitable yet cash poor and unable to cover expenses.
Profit is ultimately an accounting principle. It’s the money left on the balance sheet after accounting for expenses to manufacture and sell the company’s products and services. “Cash,” however, is the actual amount of money a business has sitting in the bank to fund current operations. Just because a business is making sales doesn’t guarantee there will be cash available to pay expenses. That’s why it’s so important for businesses of all sizes to implement some form of cash flow management system.
Best practices for planning and managing cash flow
If you’re ready to take control of your money, start by running a cash flow report. This should record income against your financial activities such as:
- Operational expenses
- Staff and HR
- Equipment purchases
- Taxes
With this report in hand, you should be able to see clearly when money is coming in and leaving your accounts. By comparing the two and identifying key features of the company’s unique cash flow, you can start to form plans for improvement.
4 Steps for tightening your cash flow system
If your cash flow report shows problematic gaps where you might run low on operating capital, then it’s time to take steps to streamline your system. Here are a few ways you can get started:
- Learn your unique cash-flow cycle: Don’t make any big changes until you know your cycle inside and out. Do you have seasonal influxes of cash or expenses that happen regularly at certain points on the calendar? What does your yearly timeline look like? What about monthly? Know your cycle from one end to the other so you can identify key periods that need adjustment.
- Urge customers to pay on time: If a business is too lenient with late payments, that can throw off its entire cash flow equation. If income isn’t arriving at appropriate times, gently step up communication with outstanding clients to ensure the right amount of cash will be there when the business needs it.
- Don’t hang on to inventory: Turn over inventory as quickly as possible. Products sitting on the shelf continue to cost money for marketing and storage. Turn any inventory you’re saving into cash as quickly as possible.
- Negotiate with vendors: Service expenses can choke out revenues. Use smart negotiation tactics to secure the best possible contracts and structure payment when its advantageous to your cash flow cycle. Get the highest level of service from your vendors by choosing the best option and negotiating with them on price and other factors.
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