"Cash flow is king" is one of those business mantras that we all repeat but never stop to question. But have you ever wondered why it’s king? Shouldn’t profit be the ultimate end goal? Read on for the answers to the cash flow questions you’ve always wanted to ask.
What is cash flow?
Cash flow is the money that goes in and out of your business. Many figures feed into it including accounts receivable, inventory, accounts payable, capital expenditures, and finance repayments. Time is also a factor. For example, when you invoice a customer you create revenue that shows in your profit and loss. It’s only when your customer pays you that you get the cash.
Why is cash flow important?
Cash flow is one of the most important factors to keep an eye on in a small or midsize business. Why? Because if your cash flow isn’t healthy it could mean you won’t have the money you need to invest for growth when you want to. And in the worst-case scenario when there’s more money going out than coming in, you’ll be facing bankruptcy.
How do you manage cash flow?
To be certain you have your cash flow under control and aren’t in for any nasty surprises, you should be tracking it weekly, monthly, and/or quarterly. Tracking cash flow will give you the visibility you need and help you project future cash flow when you’re thinking about investing to grow your business.
You can track cash flow on a spreadsheet, but using cloud accounting software makes it so much easier and more efficient. Aside from the other productivity benefits that an automated approach gives you, you’ll have all the figures and all the visibility when and where you need it.
How can you improve cash flow?
So you’ve started tracking cash flow and you’re getting the visibility you need. But what happens if you don’t like what you see? Here are a few ways you can improve cash flow.
- Cut costs: We’ll start with an obvious one first. Can you get better deals on your rent, your utilities, or your insurance? Can you negotiate discounts with frequent suppliers? Look for areas where it’s easy to cut back or save a few pennies.
- Lease equipment instead of buying it: When you lease equipment, you don’t have to find capital to buy it. There can be tax advantages too.
- Invoice promptly: The quicker you invoice the quicker you’ll get paid. It may seem a bit of an administrative burden that’s tempting to put off, but it could be impacting your cash flow.
- Offer discounts for prompt payment: This can be a great way to encourage sluggish payers. Just make sure the discount makes good financial sense!
- Ask for deposits or invoice in stages: This is especially useful for large contracts or contracts that may go on for some time and will help smooth out peaks and troughs.
- Get control over your travel and expenses: A typical company spends more than 10% of its annual budget on expense and travel, so this is a biggie. Tools such as Concur TripLink and Concur Expense help you get travel and expense spend into your system much more quickly and help you see where you could cut down or negotiate discounts.
- Don’t pay your suppliers too quickly: It will harm your relationship to pay late, but the more quickly you pay the more quickly the cash leaves your account. Make your capital work for you by finding the optimum time to pay.
- Save money: Put spare cash aside for a rainy day or future investment plans. And if you can save it somewhere that pays interest, even better.
Cash flow crunch time
Business Insider found that 82% of small businesses fail due to cash flow problems, which is a sobering thought. And it’s why cash flow, not profit, needs to be king in your business. Download the whitepaper to learn five steps you can take towards strategic spend management.