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Cash flow is the life blood of business as it supports operations and future growth.  Therefore, periodically assessing your cash flow strategy is important to the ongoing health and success of the business.

Cash flow is the movement of money in and out of the business.    It is important to have a positive cash flow as this allows for future investment opportunity.  Long term, cash flow along with equity and debt financing represent financial options available to small business.  This is not to suggest that all three options are available to every business, therefore, cash flow becomes the major option for which the business has direct oversight and control.  Cash flow management is critical for daily operation and business growth. It should not be confused with profit as a business can be profitable and still have a negative cash flow which could have potential survival implications. 

While most business practices stress a monthly review of the balance sheet and income statement, this does not provide a complete or adequate financial picture of the business’s overall health.  Cash flow analysis includes accounts payable and receivable, inventory, expenditures, and other business expenses thus resulting in positive or “leftover” cash available for investment or building a cash reserve.

In the current business environment, cash flow is extremely critical to the survival of a small business.  As such a periodic review of not only cash flow data but also factors that influence cash flow should be performed.  The following factors have a significant impact on creating a positive cash flow:

• Delayed Payments – While it is important to offer reasonable terms for customer payment and some form of discounts, terms and conditions for payment should not exceed 2-3 months.  This may result in your inability to pay your own expenses. 
• Bad debts – This represents a significant risk to businesses as in many cases the debt may never be received.  A strong customer monitoring program can assist in early identification and potential work-out strategies.
• Declining sales – This will result in loss of revenue overtime.  Review of product offering, markets, and possible product revisions or restructuring may be ways to increase sales.
• High Expenses - Expenses have a direct impact on cash flow.  Additionally, this is something that you have direct and complete control over.  Having said this, it is not always possible to significantly reduce expenses in a manner that would impact cash flow, especially in the short term. 
• Ineffective Inventory Control – A direct link has been established between inventory control and cash flow.  Inventory generates sales thus revenue, however, purchase of products to stock inventory requires cash outlays.  Monitoring the inventory turnover rate will provide a good measure in determining its impact on cash flow.

Understanding impact factors is important, however, identifying possible strategies to improve cash flow is also part of the review process. Both components make up the review and monitoring process for cash flow.

The following are some potential common strategies for improving cash flow:

• Reviewing and Reducing Expenses - This entails the identification and prioritization of all business expenses.  Consider the possibility of cutting, finding alternatives, or reengineering a process to gain efficiency. 
• Increase sales – This is a companion in a sense to expense reduction.  Often further reductions may not be possible therefore attention should be paid to sales increases.  New and/or companion products, market analysis to identify new markets, and review of existing product offerings may assist in increasing sales volume.  Often existing products may be found to be obsolete, requiring updates that would make them more attractive to customers. 
• Late Payment strategies – Every small business will be faced with customer late payments at some point.  Possible strategies to reduce this problem include an early payment discount or a late payment penalty charge. 
• Ease of Payment – By making it convenient and easy for customers to pay their invoices, it may result in a better turnaround of accounts receivable.  This can be accomplished through bookkeeping applications.  Therefore, review the application and make sure you are utilizing it to its’ full capability on the receivables side. 
• Negotiate vendor payment terms – Accounts payable have a direct impact on cash flow so it is advantageous to review your payment terms with vendors.  Seek to have a 60–90-day payment period where possible. 
• Automated payment reminders – This is a companion to ease of payment.  Often customers may require reminders.  This may be something that the bookkeeping application can generate. 
• Customer payment terms - If there appear to be specific customers that are regularly making late payments it may be beneficial to have more tailored terms.  Utilize direct payments and regularly scheduled payments through the banking system to ensure receivables are collected. Conversely, for those customers where there is a strong relationship, discount terms can be offered to encourage early payment. 
• Invoice Financing or Invoice Factoring - Invoice financing allows you to get money for unpaid invoices from a financial institution.  Invoice factoring will reduce your receivable amount as it will require you to sell your accounts receivable for a lesser amount. 
• Utilize Business Credit Card - This acts as a buffer to cash flow.  It allows you to defer payment on some expenses until payment is received.  Further it does not diminish any existing cash reserve funds.
• Build a cash flow reserve – A cash reserve of 2-3 months provides a cushion to fund expenses in a down month. 
• Cash flow forecasting – This requires a small business to provide the best estimates on sales and expenditures.  To forecast look at profit and loss and sales and expenses.  This will allow predictions for both sales and cash flow. 

Monitoring cash flow performance is an essential business practice.  This should include more than a periodic review of cash flow reports. Ongoing or frequent review of proper and adequate performance metrics can provide insightful details not only on the level of performance but also indicate areas where improvements can be made to create a healthy cash flow.  Cash flow includes three major components: operating, investing and financial activities.  As such a sound set of metrics should cover important performance data for each component.

The following are metrics to consider:  

• Operating Cash Flow - This metric includes net income, non-cash expenses and changes to working capital.  It does not include revenue from interest or investments therefore it indicates the business’s ability to operate on its own revenue generation.
• Working Capital – A liquidity measure that indicates how quickly the business can generate capital.  It is a simple measure of current assets/current liabilities. 
• Free cash flow - This measure shows the amount of cash that is available after current expenses and capital expenses are taken out of operating cash flow.  Free cash flow can then be reinvested or set aside as a buffer cash reserve when needed.
• Cash flow coverage ratio – Provides information on the businesses ability to cover debts utilizing operating cash flow. 
• Cash flow margin – Provides critical data on the amount of cash coming from operating activities as a percentage of sales revenue for a specific timeframe.  This measure can provide insight into sales activity, marketing issues and/or appropriateness of product mix. 
• Cash conversion cycle – Measures the number of days it takes a company to convert its inventory to cash.  This measure can identify an inventory management problem which, as shown, can have a direct impact on cash flow. 
• Daily & Weekly Debtor Analysis - Provides a list of all customer orders owed and how long they are open.  This information on receipt time gives a picture of the businesses’ accounts receivable practices and process.  This has a direct impact on cash flow and is an area where improvements may be considered.
• 30-day and 13-week operating cash burn – Indicates the rate of cash being used for short- and medium-term scenarios.  Utilizing this should be tempered in cases where seasonality is a factor. 
• Weeks of liquidity on hand – This is particularly useful in times of economic downturn.  It indicates the time, in weeks, that a company can pay its financial obligations.

Performing periodic cash flow analysis can help the business with future growth plans as well as sustain a healthy ongoing cash flow.  Generating the appropriate monitoring metrics may be possible with your existing accounting system.  Otherwise, Management Information Systems (MIS) are available that can provide the information.

In the event your business may have a unique need for outside assistance with operational issues, growth initiatives or other business matters, SCORE mentors can offer you expertise and support.  Mentors with a wide range of technical and user experience are available on request.

The Cleveland Chapter of SCORE was founded in 1965 to foster and support the small business community in Northeast Ohio through mentoring and education.  There are currently 80 volunteers with experience in the fields of business ownership, managers, accountants, attorneys, and other business fields that are ready to share their knowledge through mentoring.  For more information about our services for small business visit the website at www.cleveland.SCORE.org or call (216) 503-8160. 

In addition to mentoring services, there are also webinars and on-demand classes listed on the website.   To attend a webinar, visit the site and register.  Following are upcoming live webinars in November:

                Seminar Title                                                                                 Date & Time

How to Build a website for your business Q & A                                  Dec 6 -  1:00 PM

How to Start a Nonprofit in Ohio                                                               Dec 6 – 7:00 – 8:30 PM

How to write a business plan & avoid getting stuck                           Dec 7 – 1:00 PM

How to Trademark your business brand                                                 Dec 8 – 1:00 PM

Funding your nonprofit                                                                                 Dec 8 – 7:00 – 9:00 PM

Nonprofit series: Building capacity in your nonprofit                        Dec 13 – 7:00 – 8:30 PM

Starting an e-commerce business – tips for selling online                                Dec 15 – 1:00 PM

Nonprofit series:  Grant writing basics                                                     Dec 15 – 7:00 – 8:30 PM

Starting a business – How to start a foundation that lasts               Dec 20 – 1:00 PM

Getting certified as a minority-owned, women-owned,

 veteran-owned business                                                                             Dec 29 – 1:00 PM