What You Must Know About Managing Cash Flow

All of the fear-inducing references you’ve heard and read about cash being king in your business are absolutely true. But cash isn’t just king. It’s the entire kingdom. Poor cash management is one of the leading reasons why many small businesses do not succeed.  Without adequate cash planning, a cash crunch can wipe out your business faster than you can say “negative cash flow.”

So let’s take the mystery out of why, exactly, cash is king in a business and examine how to understand and manage cash flow. In this first of four articles, we’ll lay out the basic things you need to know about cash flow and why these concepts are so important for your company’s survival.

One of the most critical factors in the success of a business is getting a handle on your company’s cash flow – both actual cash flow and future cash flow forecasts. Here are some important definitions you should know that can help you understand managing cash flow:

  • “Cash Flow” is simply the flow of money moving into and out of a company. For any business, it’s essential to know if you’ll have enough cash to cover debts and where that cash will come from.
  •  “Inflows” is any money that flows into the company, typically from sales revenue.
  • “Outflows” is any money that flows out of the company, typically from expenses.
  • “Net Cash Flow” is simply how much is left over after you pay your debts. By the most basic of definitions, net cash flow is money the company earns minus money the company pays out.
  • “Solvent” versus “Insolvent” are terms that refer to the state of a business. If a company has a positive net cash flow and can pay its bills, then it’s solvent. It’s a going concern. When the company runs out of cash and can no longer pay its debts, then the business is insolvent. Running out of cash often means closing the business.
  • “Cash Flow Report” is a review of how money flows in and out of a company. It’s an easy way to spot red flags and identify why the company is having cash flow problems.
  • “Cash Flow Forecast” is the same as a Cash Flow Report, but looks at the company’s situation in the future rather than its current cash flow situation. Forecasts are easy ways to spot and fix problems before they can derail a company.
  • “Cash Flow Management” is the process of identifying the best ways you can keep a handle on cash flow in a business, including ways to improve how cash flows in and out of the business.

You can take control of your company’s cash flow by managing how efficiently money flows in and out of the company.  The important part is that you make a plan for how to manage cash flow. Here are the basics of what you can do to improve your cash flow situation:

  • Create basic forecasts for your company. These reports should include a sales forecast, profit & loss forecast and a cash flow forecast. Without these basic tools it’s hard to know where you’re headed.  You can find free templates for creating these forecasts at Enloop or SCORE.
  • Manage your inventory, expenses and revenue to be as efficient as possible. This will improve your net cash flow and the overall financial health of your company. Do this as a matter of course for your business and you might be able to avoid cash crunches all together.
  • Improve your accounts payable and accounts receivable terms. Negotiate better payment terms for what you owe, but insist on earlier payment terms for what’s owed to you.
  • Collect on what’s owed to the business. Offering to take a percentage on outstanding balances might be painful, but it’s better than never being paid at all.

With a basic understanding of these terms you can begin to think about how cash flows in and out of your business. Your job then becomes taking control of and actively managing the company’s cash flow situation. Becoming aware of potential cash crunches as far in advance as possible gives you an upper hand in keeping the company on an even keel.  The worst position you can find yourself in is up against a cash crunch and unable to pay the company’s bills. Getting a bank loan or line of credit is far easier when you’re not in the middle of the crunch. Staying vigilant and proactively involved in the company’s cash flow gives you a distinct advantage—one that might just provide you with the keys to the kingdom.

Cynthia McCahon
<div> After years of providing business planning and development services for private clients, Cynthia became acutely aware that many entrepreneurs struggled to develop accurate business plans and saw the need for a free tool like Enloop.</div> <div> <a href="http://www.enloop.com" target="_blank">enloop.com </a>|<a href="http://www.facebook.com/EnloopTeam" target="_blank"> Facebook</a> | <a href="http://www.twitter.com/cmccahon" target="_blank">@cmccahon</a> | <a href="/author/cynthia-mccahon/all-posts" target="_blank">More from Cynthia</a></div>


Thanks, Rob. At Enloop we

Thanks, Rob. At Enloop we believe that cash is the primary concern for any business--and can also be the most intimidating when it comes to forecasting cash flow. Businesses can quickly get into trouble because they're fearful...or just don't have practical experience in how to do a basic cash flow forecast. We've tried to make the process as easy as possible so they can get beyond the fear factor and begin understanding their cash situation.

Cynthia, this is an excellent

Cynthia, this is an excellent and very important article. A lot of small businesses don't know what cash flow is -- they just know whether they have enough money to pay the bills and conduct business. And the Profit and Loss statement doesn't tell the whole story.

Like you say -- a company can have all the customers it wants, but still run into trouble simply because it doesn't have enough cash in hand.

This article has very helpful

This article has very helpful information. I have a free cash flow template and detailed information on how to set up your own cash flow projection at www.smartbusinesscashflow.com.

Post new comment

The content of this field is kept private and will not be shown publicly.
This question ensures you are a human visitor to prevent automated spam submissions.
Enter the characters shown in the image.