Cash Flow Management: The Lifeline of Your Business

Why Cash Flow is King

You've probably heard the saying "cash is king." In business, this couldn't be more true. Even profitable businesses can fail if they run out of cash. Understanding and managing cash flow is essential for survival and growth.

Cash Flow vs. Profit: What's the Difference?

Many business owners confuse profit with cash flow. Here's the key distinction:

A business can show a profit on the income statement while simultaneously running out of cash. This happens when:

The Three Types of Cash Flow

1. Operating Cash Flow

Money generated from your core business operations—selling products or services and paying regular expenses.

2. Investing Cash Flow

Cash used for long-term investments like equipment, property, or acquisitions.

3. Financing Cash Flow

Cash from loans, equity investments, or paying dividends and debt.

Building a Cash Flow Forecast

A 13-week rolling cash flow forecast is essential for any business. Here's how to create one:

Step 1: List all expected cash inflows

Step 2: List all expected cash outflows

Step 3: Calculate net cash flow weekly

Step 4: Track actuals vs. forecast and adjust

7 Strategies to Improve Cash Flow

1. Invoice Promptly

Send invoices immediately upon delivery of goods or services. Every day of delay is a day without payment.

2. Offer Early Payment Incentives

A 2% discount for payment within 10 days can significantly accelerate collections.

3. Tighten Credit Terms

Review customer creditworthiness and set appropriate payment terms. Not all customers deserve Net-30.

4. Negotiate Vendor Terms

Push for longer payment terms with suppliers. If customers pay in 30 days, negotiate 45-60 days with vendors.

5. Manage Inventory Carefully

Excess inventory ties up cash. Implement just-in-time inventory practices where possible.

6. Lease Instead of Buy

Leasing equipment preserves cash for operations while still providing needed assets.

7. Establish a Line of Credit

Secure a line of credit before you need it. Having access to emergency funds provides peace of mind.

Warning Signs of Cash Flow Problems

Watch for these red flags:

Conclusion

Effective cash flow management separates thriving businesses from struggling ones. By implementing these strategies and maintaining vigilant oversight, you can ensure your business has the cash it needs to operate and grow.

Need help managing your cash flow? Contact Tuesday AIA for expert guidance.