There is an oft repeated tip in business – cash is king, and it is widely accepted that without it, a business empire will be on the ropes. Cash flow is one of the most critical components of success for an SME. Firms that don’t maintain good cash flow may not be able to make much needed investments to compete, or they may have to borrow more to function. Poorly managed cash flow in amongst the top three causes of business failure, but what does it actually mean to have good cash flow?
Broadly speaking, cash flow can be broken down into two categories, positive and negative. Positive cash flow occurs when the money received each month from sales is greater than the amount of cash which is leaving the business. Negative cash flow is the opposite of this, with the money being spent outweighing the money being brought in, leading to a gradually decreasing value of cash in the company accounts.
Achieving a positive cash flow does not come naturally to a business. A full analysis of your business cash flow situation will highlight any upcoming issues and allow you to gain greater control over the inflow and outflow of cash through the business.
One of the key things to remember with cash flow is that profit does not necessarily equal cash. You cannot just look at the Profit and Loss statement to gain an in depth understanding of your cash flow situation. Many other financial figures impact your company’s cash flow, including accounts receivable and payable, inventory, capital expenditure and any debt which you have to service.
Smart cash flow management requires a level of focus on each of these factors, in addition to scrutiny of the P and L. Growing your business can put a big strain on cash. You almost always have to make investments and make expenditures in expectation of the expected increase in revenue which growth would bring.
There are several ways to improve cash flow, from improving the processing of receivables, reducing credit extensions, increasing sales, giving customers discounts for swift payment, and even taking out short term loans.
A good place to start with understanding your cash flow, is get the answers to two simple questions;
1) What is your cash balance today
2) What do you expect your cash balance to be six months from now?
If you can’t answer both of these questions, then you do not have control over your cash flow.
To find out how The Business Board could help you better manage your cash flow, call us today on 0845 337 3327 and book into a free consultation today!