5 Best Practices of Cash Flow Management
“The fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality”
~ Chris Chocola
Most businesses have this unwavering focus on “profits”, which isn’t a bad thing at all. However, that’s only half the story. In reality, it’s the cash flow that’s the most important thing a business should be focused on. Profits might look good on paper but it’s worth nothing more than the paper itself if there’s no positive cash flow to back it up.
Cash flow is the bedrock of every business. Truly profitable businesses have positive cash flows, most of the time. A great deal of that positive cash flow – everything else being the same – depends on your ability and attention to detail when it comes to managing cash flow.
Phillip Campbell, CPA, a former chief financial officer at the helm of many companies and author of Never Run Out of Cash, has this to say about cash flow:
“Despite the fact that cash is the lifeblood of a business — the fuel that keeps the engine running — most business owners don’t truly have a handle on their cash flow,”
“Poor cash-flow management is causing more business failures today than ever before.”
1. Understanding Cash Flow
Profit isn’t the same as cash flow. To put it in simple terms, business profit equals revenue minus expenses and tax. Invoicing a customer is revenue, but actually getting the payment into the bank account is cash.
If you were to total the sum of all invoices you sent out in a particular month to clients, you’d get the revenue. You’d have a fair idea about your expenses too. Put these two numbers into the equation and you’d get profit. But it’s not profit until the entire amount of the invoiced total is realized as cash.
2. Increase Sales, Not Expenses
Don’t confuse growth with profitability. The only kind of growth that matters is when you sell more and hence realize more cash. Hiring more people than you need, opening more offices across the nation, and investing in resources before you need them might all seem like “you are growing” but you really aren’t. What’s happening, however, is that you are putting a huge strain on your cash flow.
Make customer acquisition your primary focus, and even though it seems like a no-brainer, it’s harder to make it happen. Find ways to acquire customers at low costs, optimize every channel available for your sales and marketing, deploy cross-selling and up-selling to your existing base of customers. Doing so boosts your sales numbers. As long as you minimize your accounts receivables, you are on the right path to improve your cash flow.
3. Credit? Minimize or Eliminate
We almost operate on default, and that’s true for businesses all over the world. Just because 30-day or 90-day credit is common in a few industries, businesses that work within the walls of the industry tend to take that as default practice and accept the status quo. If possible, deny credit. If no other business has done that before, your business could be the first one.
If it’s inevitable (maybe due to the line of business you are in, then do your research on your clients or customers)
- Check out your clients’ Dun & Bradstreet report to begin with
- Determine if clients can really pay your bills on time
- How is the overall financial health of your client?
- Check references
- Research the Internet
- Accept credit cards or figure new ways to bill your clients
- Ask for payment upfront (even if it’s a small percentage of the total transactional value)
4. Opt Out of Discounting & Low Pricing
Too many businesses resort to low-balling bids, lowering pricing, or offering discounts. While it’s not to say that these strategies don’t work, these exact strategies have the potential to derail your cash flow (or even put you out of business). If your products and services are the best in the market and there’s no close second to the value you offer, there’s no need to sweeten the deal.
Depending on the type of business you are in, you might want to tweak the strategy a bit. Instead of offering discounts just like that, you could offer discounts for clients when they pay upfront, or when they choose to pay you monthly (or early).
If you can, or if you have the ability to do so, avoid discounting altogether. Have you ever seen a brand new Apple product on a discount at an Apple store (despite competition and the availability of many other competitive products)?
5. Back it up with technology
For small businesses, cash flow problems also come about because or disorganized financial management. Invoices are lost, orders are missed, and cash collection is random. By using the right technology, every small business can operate just as big as any Fortune 500 company.
NetSuite, for instance, allows you manage your cash flow (and your entire financial system) better with built-in real-time dashboards, reporting, analytics, and more. All of that, backed by robust cloud infrastructure without the need to maintain servers or hardware management.
Cloud computing is the biggest time saver (life saver) for your business. Using technology, you can find ways to invoice faster, go global, establish payment arrangements to minimize debtor days, offer customers new ways to invoice, make it easier for customers to pay you, and a lot more.
What do you do to manage cash flow for your business? Share some tips on managing cash flow below in the comments.