The Importance of Cash Flow in Your Business

As a Business Owner you probably know by now that the importance of cash flow in your business is the key to keeping your doors open. The management of your cash flow cannot be delegated to anyone else, but yourself.

Without cash no business can survive!

I believe that understanding what cash flow is and managing the business activities to improve cash flow, is one of the main tasks of the business owner.

Leading entrepreneur, Richard Branson, believes the following: “Never take your eyes off the cash flow because it’s the life blood of the business.”

Yet so many business owners are so busy working in the business, they only take a few minutes to look at their bank balance, and don’t spend more time understanding the full picture.

While working with small business owners over this last year, I realized again that many of them firstly, do not understand what cash flow is and secondly, how important it is having a positive cash flow in their business.

In fact, most business owners have actually never used a Cashflow Statement or understood the importance of running a weekly (yes, weekly!) Cash flow Forecast.

Robert Kyosaki states that “The most important word in the world of money is cash flow.”

What is a Cash flow Statement?

The businessdictionary.com defines cash flow as “The difference in amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance).”

Your cash flow statement will give you the opening bank balance plus receipts from customers, minus fixed and variable costs paid to staff and suppliers and finally the closing balance.

So, when is cash flow positive? Cash flow is positive when the cash balance at the end of the period is higher than the opening amount. As a business owner, you must truly understand the cash-out flow detail and ensure that you manage the costs of running the business.

How is a Cash flow Forecast useful in a business?

Business owners who have just started their business still need to learn that “Cash is King.” One way to keep track of your Cash Flow is to utilise a Cash flow Forecast.

A Cash Flow Forecast is specifically important if the business has seasonal fluctuations. For example: the plant & nursery industry, the vacation industry, etc. My suggestion as a business coach, to my clients, is that they use the cash flow tool in their accounting package, alternatively develop their own spreadsheet in excel, that gives them a detailed weekly breakdown for the next 8 weeks, so that they are prepared for any dips or fluctuations in their cash flow. So once, again, it comes down to “planning”, and planning is part of the “not urgent” “yet important” things that business owners just never seem to have the time for…..however it is crucial to running a successful and profitable business.

How can I improve Cash Flow?

Consider these following 8 points, in order to increase the cash flow in your business.

1. Selling more goods or services

Increasing the volume of products and services sold will improve the cash flow of the business, given that they are sold at an acceptable gross profit margin.

It is very important to ensure that your price calculations are correct and that you don’t start promoting a product or service that is running at a loss.

An early customer of mine realized that he wasn’t making any money on his third biggest product line when asked to review product costings before a major sales campaign.

Clearing out dead or slow-moving stock will also give the business back some cash that is tied up in inventory. Stock, if it doesn’t move, might be a liability and not an asset in your balance sheet.

Remember the saying “Turnover is vanity and profit is sanity”.

2. Selling fixed assets

Selling of unused fixed assets could assist in bridging the cash gap in a business.

This would normally be a once off event and can take quite some time to implement as willing buyers might not always be readily available.

3. Reducing costs

Reducing the cost price of goods sold will contribute to an increase in gross profit. One can consider bringing manufacturing in-house, if the business is currently buying from a third party to bring down the cost of manufacturing the goods. Expenses should be scrutinized and the “nice to have” items can be eliminated, but reducing fixed costs alone would not be enough to make cash flow positive. Become an astute money manager and put a lid on any theft or stock loss issues.

4. Increasing the selling prices

Generally, most small business owners have a problem with this and generally the problem is not in the market or with their customers, it is with themselves!

Remember that you cannot absorb price increases on products and services that you buy in for a prolonged period.

I learned this early on in my career in the FMCG industry, when the business I was working in, had abnormal raw material price increases due to the impact of adverse weather conditions on crops.

This resulted in us going back to the major retailers for a second price increase in 3 months. Something that was unheard of at the time!

5. Collecting faster

Getting your clients to pay earlier is a sure way of closing the cash gap. Move your payment terms from 60 days to 30 days or even better put new customers on a COD account.

In certain industries, like the building and kitchen cupboard businesses, one can also charge a deposit. When you do this make sure that the deposit covers your material costs so that you are only at risk for the labour portion of the sale.

6. Paying slower

Something you shouldn’t just do without consulting your suppliers.

However, when you need to do this engage with your supplier and explain to him why you are in this position and then stick to the arrangements that you have made to repay the overdue account.

7. Bringing in more equity

If you cannot generate enough cash from the areas highlighted above then the only other option could be to bring in an investor into your business to help finance the growth of the business.

This would however mean that you now have a partner in the business and would certainly complicate the way that you as a solopreneur must operate.

8. Taking out a loan

Taking a loan from the bank is a great way of leveraging your money and can be used to finance certain projects for a period where the outflow is higher than the inflow, typically at the start of a new project.

Managing your cash flow is certainly not difficult to do but it may at times require strategic decision making to ensure that the business doesn’t run out of it!

How did you work through your cash flow challenge and what did you learn?

Connect with me today to start creating inspirational business results!

Yours in great business,

Coach Bert