A Simple Cash Flow Perspective

I recently conducted a poll of business owners, asking what their biggest challenge was.  Cashflow was one of the top 3 responses.

So what is the definition of cash flow?  Cash flow is the change in cash balance over a period: positive if the cash balance increases, negative if the cash balance decreases.  You knew that, right?  Obviously, money received from customers is one part and the other is the money paid out to vendors and creditors.  That was easy.  But not the total answer.

Consider the idea that negative cash flow is a symptom of something and not the problem itself.  If we want to improve our available cash and the rate that it increases, consider these intentional habits you can implement.

Revenue impacts:

  • Increase sales and decrease the time to collect.
    • Increase marketing and sales efforts with a targeted strategy.  Spend your money marketing on your ideal customer.  KNOW who your customer is before you start.  
    • Invoice promptly – many service companies delay invoicing for services up to 30 days.  This is a typical pattern for professionals like CPAs, Attorneys, and Consultants.  Change your invoicing strategy to weekly billing.  
    • Provide shorter terms that include a 1% early pay discount.  Terms should not exceed 30 days and 15 days is even better.  You do not want to play banker
    • Get your money quickly to avoid seeing the banker for borrowing because of negative cash flow.
    • Drop your price – you can change prices but doing so may cause you to lose any competitive advantage you have.  Avoid appearing like a discounter because the perceived value of your product may be adversely impacted.
    • Increase prices – can have a reverse impact and you may lose business because the competition is charging less.   Pricing decisions need to be dealt with by weighing short and long-term impact.  If you feel that your stricter policies will infringe on the “customer relationship”, consider getting a line of credit to smooth out cash flow.
    • If you have product cost as part of your offering, collect the money upon delivery.  If you do this it will cover your costs quicker and avoid the negative impact to cash flow.
    • Selling based upon price is a strategy that needs thorough examination before the pursuit.  

Expense impacts:

  • Manage expenditures with a strategy
    • Spend less is the easy answer.  Consider knowing what your cost of business is at the very foundation of managing cash flow.  Create a budget for your business with detailed categories.  Look at spending trends and create a budget based upon that.  Add any realistic increases only if there is a benefit to profitability and efficiency.  
    • Add what you need for your personal draw or salary to your budget for the business.  Budget your personal expenses separately, the same way you do for your business.  Do not pay personal expenses from the business account.
    • Add the two budgets together, then add 15% to that total.  This is where your revenue needs to be at a minimum.  The 15% represents a reasonable return on your investment and endeavors to be an entrepreneur.  If you want to get aggressive, add a bigger return and shoot for real growth!
    • Two basic principles that I tell my clients: 1) avoid credit cards as a form of financing 2) do not pay personal bills from the business.  If you burden the business with excessive personal expenses, the business will die a slow death.  NO business … NO income for you!
    • Creditors can be managed the same as customers.  Get early pay discounts.  Ask for discounts if you commit with purchase orders.  Shop for the best prices!

Always consider the cost of money.  That includes both the revenue and expense side of the cash flow equation.  Adjust what you charge for your goods and services to cover the cost of your borrowing or carrying receivables.

It is plain simple to understand how managing money works.  I have stated in other posts, managing money is the most important skill to master as an entrepreneur.  Work at it and be the master of your cash flow.

Now, go create a budget, collect some receivables and figure out how you can sell more.  Don’t forget to leave your credit card in the desk!

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