Cash Flow – How It Works to Keep Your Business Afloat

According to a study, 82 percent of business failures in the US are due to poor cash flow management, or poor understanding of how cash flow contributes to business. Whichever part of the world your business is operating in the fundamental reality is that lack of cash flow is why most businesses fail.

Managing cash flow well is also important for growth. Growth is the aspiration of every business leader however growth requires cash flow. In fact, businesses are leaving profits and revenue on the table because they do not have cash flow to entertain the deal and project on offer, which they otherwise have the skills and capability to deliver.

Managing your cash flow well is critical to your business and to your growth. Here are some practices we recommend as you go on this journey:

Plan your business for cash: Profit is an opinion; cash is a fact. Profit is an accounting concept. You can’t use a concept to pay bills. It is entirely possible to be profitable but run out of cash and go bankrupt. Build your business around generating cash flow to enable your business strategy to be executed without hindrance. Having a cash flow management plan as a guiding light for your business is critical. The plan should include cash flow statement, cash flow burn and cash flow forecasting. Check the cash flow forecasting from the plan and money coming and going out of your business weekly.

Focus on accounts receivables: Governance around getting money in is often a quick win and a powerful way to improve cashflow. Wherever possible and all other things being equal pick business based on payment terms. Focus during negotiations on price on payment terms that suit you especially how much advance you get and how quickly after delivery of goods or services will the client pay. Invoice moment you can. Clients have a process for paying which will not start until you invoice them. Once you have delivered products or services, have professional but regular follow-up until the money comes in.

Manage your spending: Focus on the “must do’s”. Make sure services essential to business like broadband, utilities and workspace services are cheap without compromising the quality needed. Avoid big ticket items. If you must spend see wherever you can break payments over a period of time. If you can forego ownership and instead use a “sharing” or leasing model even better. If you carry inventory think about how to keep it as lean as possible, so you do not compromise customer experience yet tie up minimum cash possible. Wherever possible get aggressive credit terms in your favor from your suppliers. This does not mean you stop investing. Strategic investments like marketing or hiring people against business won are critical to generating revenue and accelerating growth.

Get Help: Have a resource that can make a cash flow statement, do cash flow forecasting and keep an eye on your cash flow and discuss it regularly with you. It is important to highlight potential issues early. If you cannot afford such a resource at this time outsource this as a service to a consultant who will cost less than a full time resource. Use technology where you can, to help your business and accounting resources with cash flow management.

Cash flow management comes with experience but once you integrate it into the management of your business you inculcate within it the resilience to survive the pervasively unpredictable business environments, we often find ourselves in. Understanding cash flow is also underrated as a key skill for conducting business dealings outside your own operations. Is the client you are investing so much incapable of paying you on time? Do the partners, you are selecting for overseas expansion, have staying power as you execute on your plan? Are the key suppliers you need robust in their cash flow so as to not let you down at a key moment? Cash flow cognizance is not just an operational capability it is also a strategic skill.