Cash Flow Management 101

Most small businesses don’t rise and fall on their profits – what affects them the most is CASH FLOW. Cash is your business's lifeblood. Managed well, cash keeps your company strong. Managed poorly, your company tanks.

Knowing what affects your cash flow is the first step to avoiding a cash crisis. Most business owners believe their cash flow is defined as the revenues they generate less the expenses they have to pay. Not true.

The accounting rules that govern the creation of financial statements are not about tracking the actual flow of cash through your business. They are focused on measuring profit or loss at the end of the period - not cash flow.

The "bottom line" of your P&L is net income. And net income does not tell you what happened to your cash balance during the period. Meaning you can show a profit at the end of the month, but have had difficulty meeting payroll on the 15th and paid some bills late along the way. Your statements may show profit but your cash flow stinks!

Cash flow is made up of more than just profit and loss. It also is affected by: Accounts receivable, inventory, accounts payable, capital expenditures, borrowing and changing debt service, the timing of all these activities.

That's why you can't look at your income statement and see what happened to your cash during the month.

Luckily, the first step to improved cash management isn't exactly brain surgery: just start maximizing cash flow. There are many ways for companies to improve their cash position simply by making certain that their billing, collections, and payables systems are operating as efficiently as possible. Try to bring cash into the company as quickly as possible: bill promptly, aggressively follow up on overdue invoices, and, if possible, require up-front deposits when making sales. Then hold onto your cash as long as possible by managing your payables. That means, quite simply, take as long as you're allowed (without incurring late fees or interest charges) to pay your bills.

For more elaborate cash flow management, you must accurately assess your current cash position and make fairly reliable projections at key intervals about how much you'll need to meet expenses in the future.

If you're interested in delving deeper into cash management - shoot me an email at trish@akamai-consulting.com and I'll send you an Excel spreadsheet that will help you make easy cash flow projections for a full 12 months!