If, as many experts admit, the golden rule of the business world is that “money is king”, happiness in business is a positive cash flow. Cash flow is the movement of money in and out of your business for a defined period of time (weekly, monthly or quarterly). If the cash flow in your business is greater than the cash flow, your business has a positive cash flow. However, if your cash outflow exceeds cash inflows, then your business has a negative cash flow. To create a positive cash flow, generate more money and recover it faster while maintaining or reducing your expenses.
Positive cash flow does not occur by accident; This happens because a well-defined financial management technique called “cash management” works. A good cash management system can effectively manage cash generating activities. It is very important to maintain an optimal level of cash flow, neither excessive nor insufficient. Accelerating cash inflows whenever possible is a mandatory practice. Billing customers as quickly as possible and raising funds in overdue accounts are two of the activities that accelerate cash inflows. Delaying cash outflows to maturity is a crucial step in maintaining liquidity. Negotiating extended payment terms with suppliers also delays cash outflows. In addition, investing in excess cash to achieve the highest rate of return is a good business practice.
Understand the magnitude and timing of cash flows
To understand the magnitude and timing of cash flows, it is essential to track cash flows using cash flow forecasts. A cash flow forecast gives you a more accurate picture of your sources of cash and your expected arrival date.
Your financial disclosure documents must include a statement of operations, a balance sheet and a statement of cash flows. Your “Cash Flow Forecast” reflects the three types of cash flow activities that appear in your cash flow statement. The three types of treasury activities are:
o Cash flow from operating activities: this is the cash flow generated that results directly from the sales of your products / services.
o Cash flows from financing activities: these are cash flows generated by external sources: lenders and investors.
These three types of treasury activities are interdependent. They depend on each other and affect each other. The cash flow forecast should take this into account and provide a complete picture of the source and use of cash for the forecast period.
Cash outflows and cash inflows rarely occur together
Cash outflows and cash inflows rarely occur together. This deficit is your “cash gap.” The cash gap is the period (number of days) between the cash payment by your company of the goods and services purchased and the receipt of money by your customers for the goods or services sold. In other words, the days of stock inventory + the debt collection period – the accounts payable period = the cash differential. This interval, the cash deficit, must be financed. Keep in mind that each day your cash flow deficit expands, as well as the amount of interest accrued. Even when interest rates are low, the cost of financing can quickly accumulate.
Your company can reduce your cash gap in three ways:
1. Extend your payment terms on inventory purchases. In most sectors, payment terms are largely determined by tradition and vary from one sector to another.
create a more positive cash flow
2. Reduce the collection period. The faster your company can raise money for products and / or services sold, the lower your cash flow deficit.
3. Increase inventory turnover. The faster your company moves inventory, the less effective it will need. To manage your inventory successfully, it is essential to constantly monitor your daily sales activity against your inventory.
Profit growth does not necessarily mean more effective. Earnings (or net income) are the difference between your company’s total income and your total expenses. Measure the efficiency of your business. Cash flow measures the cash flow of your business (the ability to pay bills and other financial obligations on time). You cannot spend profits; You can only spend money to pay providers, employees, government and lenders.
Many small business owners have discovered
Many small business owners have discovered that profitability does not guarantee liquidity. Over time, your company’s profits have little value if they are not accompanied by a positive net cash flow. To create a positive net cash flow, generate more cash and collect it faster, while maintaining or reducing your expenses. The four ways that can help your company generate more cash are:
1. Increase sales by attracting new customers. Your business cannot be maintained without adding new customers. The acquisition of new customers is a process that combines market data with direct marketing tools to identify and reach high potential potential customers and convert them into customers.
create a more positive cash flow
2. Increase sales by selling additional products / services to existing customers. It is much cheaper to generate additional businesses from your existing customer base than to generate new businesses from new customers. Periodic review of the purchase history and purchase frequency of your customers can reveal interesting facts about your customers’ shopping habits.
3. Generate more money for every dollar of sales. The increase in sales prices and the reduction in the costs of goods sold generate more cash.
4. Reduce overhead. General expenses generally include facilities, equipment, administrative and management personnel. The key is to produce a higher turnover at a lower cost.
Ideally, during your business cycle
Author, speaker and consultant, Terry H. Hill is the founder and managing partner of Legacy Associates, Inc., a business consulting and consulting firm based in Sarasota. A former Executive Director, Terry works directly with private business owners on the problems and challenges they face at each stage of their life cycle.
Author, speaker and consultant, Terry H. Hill is the founder and managing partner of Legacy Associates, Inc., a business consulting and consulting firm based in Sarasota. A former Executive Director, Terry works directly with private business owners on the problems and challenges they face at each stage of their life cycle. Terry is the author of the reference book on the business desk, How to start your business. Present the Legacy Business Insights blog at and write a biweekly electronic newsletter, “Business Insights from Legacy e Zine”.