Cash Flow Management

Think of cash flow as the lifeblood of any business. To generate sales and revenues, the business needs goods and services which will be sold to customers. This in turn requires the business to pay vendors for those products, raw materials, services, shipping, and such. For all this you need cash which ideally should come from business operations.

The cash you owe to vendors/others for their products and services is called accounts payable, while the cash you are yet to receive from customers for your sales and services is called accounts receivable. This inflow and outflow of cash within a business is called cash flows, and how this is managed has a big impact on the health and profitability of any business.

If the money flowing out is greater than the money flowing in on a regular basis, then this situation could lead to a negative cash flow position in which you may not have enough cash on hand to run your day-to-day business. To stay afloat, you either must borrow money at a high cost, or make drastic changes to your business which could hurt growth and future profitability. To ensure that a business manages its cash flow efficiently, here are a few metrics that should be watched closely over time:

To maximize cash flows you need to look at three most important areas in your business: Operations, Investing, and Financing activities.

Cash flows from Operating Activities

Cash flow that results from regular business activities is usually referred to as operating cash flows. Cash inflows are from sales and revenues, and cash outflows are due to operating expenses such as rent, payroll, cost of goods, admin, overhead and such. Cash that is owed to you from customers and other parties is called accounts receivables (AR), and cash that you owe other parties for their goods and services is called accounts payables (AP). How you manage and time AR and AP is very important when it comes to mazximizing cash flows.

Cash flows from Investing Activities

Likewise cash inflows can come from sale of investments, and cash outflows can result due to investing in capital projects such as purchasing of new assets and buildings, or acquiring companies to expand your business, and these together are called cash flow from investing activities.

Cash flows from Financing Activities

Last but not least, cash inflows due to borrowing from investors, lenders, or other institutions, and cash outflows due to payments made to repay debts, are together referred to as cash flows from financing activities.

To maximize cash flows in a sustainable manner you must focus your attention on operating cash flows because these cash flows are recurring, ongoing, and can make a real impact on your cash positon each month. Cash flows from investing and financing also play an important role, but they are not as frequent and do not reflect the true profitability picture of your business. So, the more you try to improve your business operations, the more your cash flows will improve.

Here are a couple of things you must keep in mind that will help you maximize your cash flows from operations.

1. Maximize operating cash flows by driving higher sales, lowering cost of goods, mimimizing operating expenses especially fixed costs such as rents, payroll, overhead etc, and lowering any other expenses you incur in running your business.

2. Improve your cash conversion cycle. What this means is that you reduce the time it takes to sell your goods and services and convert that into cash. The quicker you can do this, the more cash will rotate through your business. Also, lowering the time it takes to collect payments from customers also will help in getting cash faster. While stretching out the amount of time it takes for you to pay bills to your vendors and other parties will allow you to hold on to cash longer, obviously without violating your terms with vendors. By receiving cash faster and holding it on for longer you are making sure that cash inflows will also be greater than cash outflows, which will result in a positive cash position for your business. This will be extremely beneficial in managing your operations as you will always have cash on hand to support your business when it's most needed.

Lastly, by lowering capital expenditures when possible, and managing debt smartly will allow you plan cash movement in and out of your business, and enable you to protect valuable cash that may be needed for business operations. Be smart about timing of when you spend valuable cash on expansion and capital projects. You don't want to commit to a project and then realize that you may not have enough cash on hand to run your business. This can put your business at serious risk, or the least force you to borrow money at higher rates. Also, if you have outstanding debt then plan on how you can lower your debt payments or refinance debt at a lower rate and try to keep more money in your business.

So the bottom line in maximizing cash flows is better business operations to drive higher operating cash flows, and smart and judicious investing and financing activities. Together these strategies should enable you to maximize cash flows for your business.

If you need help with maximizing cash flows, or forecasting cash flows for your business to make sure you have sufficient cash to run your business smoothly, we can help! Schedule a free consultation today at www.profitspear.com to learn more.