Remember when you were in high school math class and you said, “This stuff is stupid. I’ll never use it in the real world.” Well, as a small business owner, it is time to realize that you were partly wrong. To be profitable and successful you do need some of that math you ignored then, and are still ignoring now. It is time to learn to do the math – poor cash flow management is one of the top 3 reasons small businesses fail.
Understanding how to create and maintain positive cash flow can be one of the biggest challenges owners face, and yet it is overlooked by almost all of them. That is good news for you. The better you are at managing your cash flow the bigger the edge you have over your competitors, and the better your chances are for long term success.
Understand the difference between cash flow and profit – A lot of owners make the fatal mistake of thinking profit and cash flow are the same thing, they are not. These are 2 different symptoms of your company’s financial health. You can make a profit and have cash flow problems. You can have cash flow and not be making a profit. Both are indicators there is a problem in the business.
Build up cash reserves – You will have cash shortfalls, every business does. Cash reserves will help you get through them. How much of a reserve is dependent on a variety of factors. Be realistic about figuring out your requirements, and hard-nosed about not touching the money. It is not a slush fund and should not be used as one.
Negotiate and track receivables – Keep net-60 and net-90 terms to a minimum, and think about offering early payment discounts. Assign someone the job of monitoring receivables, initiating collections and regularly updating you via the cash flow worksheet. At least weekly, although for most businesses daily is best. Do not let customers keep your money in their bank.
Negotiate and track payables – Get the best deal on payables you can for your cash flow. Contracts can often be negotiated to net-60 and net-90 terms. Pay your bills on time – paying late fees is a good indication that your cash management system is not under control.
Keep control of debt – Debt should not “just happen”, you have to manage it. Create a strict, written policy for giving credit and stick to it. Do not over extend, even your best customers will take advantage of a lenient system if allowed to. Credit is not cash until you are paid, until then it is a debt. Remember, you are running a business, not a charity.
Also, keep control over the credit you accrue. Only take on credit you can pay back, not credit you think you can pay back – do the cash flow math and have patience before you take on any debt.
Create and use a cash flow worksheet – This is an important document, one you ought to know by heart. It should tell you, at a glance, your current cash flow situation. Since it is updated and used often the simpler it is the better. There are many worksheet templates available, find one that suits you. If you have an accounting program it will be a part of the package.
Trying to run a business without managing your cash flow is like trying to shoot upstream rapids, alone in a canoe without a paddle or map. You might be able to do it. But, why make it hard, when it can be much easier? There will always be rapids to navigate, but you have a better chance at success if you are going downstream, in a kayak with a paddle and map.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: