Slow cash flow is one of the leading causes of insomnia for business owners. Even if sales are strong, a lack of liquidity to pay bills and cover payroll can cause more than a few sleepless nights. The good news is that you can rest easier by exercising sound cash flow management.
Scrutinize your cycles
Broadly speaking, nearly every business — no matter what it does — has two cycles that determine how the dollars flow. These are:
1. The selling cycle. This is how long it takes your business to:
• Develop a product or service,
• Market it, and
• Produce the product or service, close a sale, and collect the revenue.
Good accounts receivable processes — from clearly and accurately invoicing to implementing online payment methods for faster access to money — are a major aspect of cash flow management.
Less experienced business owners often underestimate the length of the selling cycle. Many a start-up has been launched with a budding entrepreneur believing the company could get its wares to market, close deals and earn revenue quickly. Grim reality usually followed.
However, even business owners who’ve been around for a while can miss changes to their selling cycles. Regular customers on whom the company depends may start taking longer to pay, or a key employee might jump ship and be hard to replace. Inefficiencies such as these are often exposed when economic conditions deteriorate.
2. The disbursements cycle. This is how your business manages regular payments to employees, vendors, creditors (including short- and long-term financing) and other parties. As payments go out, cash flow is obviously affected.
Track the timing
The selling and disbursements cycles aren’t separate functions; they overlap. But if they don’t do so evenly, delayed cash inflows can create a crisis. You want them to match as evenly as possible. Or better yet, you want to convert sales to cash more quickly than you’re paying expenses.
How can you keep tabs on it all? First, study your statement of cash flows whenever your company’s financial statements are generated. But do more than that. Regularly create cash flow statements. Despite their similar-sounding name, these reports are run more frequently — usually monthly or quarterly. You can also use financial software to set up a digital dashboard that displays weekly or even daily cash flow metrics.
Take control
If you see warning signs of an imminent cash crunch, consider these options to better control the potential crisis:
Slow down growth. Rapid growth can be both a blessing (you’re selling more) and a curse (you’re spending more on production). Cash shortages often result from a substantial mismatch between the selling and disbursement cycles, which can easily occur during high-growth periods. Out-of-control growth can also impair quality, which, in turn, sours relationships with customers and hurts your company’s reputation in the marketplace.
Review expenses. Sometimes, you can lower monthly cash outflows by converting costs from fixed to variable. Fixed expenses include mortgage or lease payments, payroll, and insurance. When an employee quits, consider using an independent contractor to fill the position. Or if a key piece of equipment breaks, explore leasing rather than purchasing. In addition, review your company’s tax planning strategies. A lower tax bill can make a big difference in cash flow.
Address asset management. How much money are you making for each dollar that’s invested in working capital, equipment and other assets? By monitoring turnover ratios, you may be able to identify and reduce weaknesses in asset management. For example, an increase in “days outstanding” in accounts receivable might improve with tighter credit policies, early-bird discounts or incentives for employees who handle collections.
We can help
Strong cash flow management skills are essential to running a successful business. We can review your sales and disbursement cycles, improve your financial reporting, and identify ways to manage your company’s cash better. If you’re looking to improve your cash flow management or have any questions, please contact us.
