Did you know that profitable, growing businesses regularly go bankrupt? One main reason is cash flow mismanagement. The typical business owner is highly skilled at their craft and knowledgeable in their product or service; however, many times, they are not formally trained to run a business, and may not be familiar with the process of cash flow management. Cash flow management is a vital skill to have to ensure long term success and stability. There are many ways to achieve good cash flow. Here are four strategies to start you on your way.
1) Balance real cash with possible cash
The first rule in sound cash flow management is: “The only money you have to spend is real cash, or that which is in your bank account. It is not future sales, accounts receivables, signed contracts or handshake agreements; it is what you have that is here and now. Those other sources are just “possible revenue” – which, most certainly will show up with various degrees of certainty as well as in different time frames. This is a hard, on-going balancing act that is so crucial to maintain. Many owners do not manage this well, and, is one of the primary reasons for the high rate of business failures.
2) Understand the financials
It cannot be stressed enough that having a working knowledge of your financials and keeping track of your cash flow is fundamental, paramount, essential and critical. Is the point made? Your business can be profitable and strapped for cash at the same time – an extremely stressful and usually avoidable situation. The three main financials to know, track and understand are the income statement, cash flow statement, and the balance sheet.
3) Set up credit before you need it
There are times when you need increased cash flow. It can be for a positive reason – growth, new product line, higher demand for services, etc. It can be for challenging reasons – equipment breakdown, customer default on the substantial balance due, embezzlement (more common than you think), etc. It takes time and energy to get a loan. It is generally confusing and frustrating. The more lead time you have to work the system the better chance you have of being successful.
4) Learn to say “No.”
Not every sale is worth making. Sales do not always equal profit, sometimes a client or contract will cost the company money and decrease cash flow, rather than add to it. Before you take or turn down business be sure to do the math and answer these questions.
- What is your break-even point and ROI?
- Can your cash flow support the project until you get paid or will you need to borrow?
- Are the margins good enough to pay back a loan or debt?
- How can you negotiate a better payment schedule or terms?
You can make your balance sheet and income statement say anything you want them to. They can be, and often are, fabricated to reflect a positive position. But, cash flow is the reality of your business, it is the facts. No matter what the numbers say, at the end of the day you either have the money to keep the doors open tomorrow, or you do not.
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