Strong income is only part of the picture
By Cornerstone Wealth Management
Cash Flow is King
The backbone of long term success for business owners is cash flow. Cash flow is defined as the difference between revenue and operating expenses. If over a long period of time business expenses are higher than revenue, the business could fail. Sounds simple, right? The challenge is, many business owners do not have a clear picture of their expenses. Cash on hand, accounts payable, and the use of credit can cloud the picture of an owner who has a “gut feel” how the business is operating.
Cash Flow statements are important to small businesses. This financial tool can reveal so much to owner(s) and/or CFO, because as they track inflows and outflows, and identify non-cash items and expenditures. A Cash Flow statement (CFS) captures sources and uses of cash, per month and per year. Income statements and Profit and Loss (P&L) statements may provide inadequate clues about cash flow, even though they help forecast cash flow trends.
Cash Flow statements can tell you what P&L statements won’t. Is your business profitable but cash poor? This can occur if your company is growing by leaps and bounds. Are you personally or inadvertently taking too much cash out of the business? That may transform your growth company into a lifestyle company. Are your receivables running too long? Is inventory growth a concern? If you’ve carry debt, do you know what the impact is of this debt to your cash flow? Do you know how much are you spending on capital equipment?
A good CFS can track operating, investing, and financing activities. Ideally, the sum of these activities results in a positive number at the bottom of the CFS. If not, the business may need to make adjustments to survive.
How can a small business improve cash flow management? Your CFS can help identify opportunities for improvement. You may find that your suppliers or vendors are too costly; maybe you can negotiate (or even barter) for better terms. Like many companies, you may find your cash flow is seasonal. Maybe you could take steps to moderate the peaks and valleys.
Can your business generate recurring, sustainable revenue? If it makes sense for your business, you might want to modify your fee structure – turn customers into subscribers to your services. Perhaps price points need adjusting, up or down. As for overdue receivables, swiftly preparing and delivering invoices can result in shorter receivable times. Another way to get clients to pay faster: offer a slight discount if they pay up inside a short period of time, or a penalty to those that don’t. If you do not already, consider requiring a deposit before you go to work for a client or customer.
If you or someone you know would like a thinking partner on this topic, we welcome your call.
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