Operating cash flow is the heart of a business, yet many small business owners ignore this important metric. As long as money continues coming into the business, owners are often happy.
What is cash flow in business?
This is a question that we’re going to answer in the next two sections to help you make better sense of your business’s operations and its ability to invest and grow.
Why Cash Flow Is So Important
What does cash mean to your business? Opportunities. If you’re making sales but money isn’t coming into your business, guess what? You can’t pay your bills and meet your financial responsibilities.
Imagine that you’ve completed a $10,000 transaction, and you feel great because you’ve just sent out the invoice with net 60 terms.
And for just a moment, we want you to answer a simple question: do you have $10,000 to invest in your business right now?
If your invoice isn’t paid yet, you do not have the $10,000. This is potential cash flow that, if paid, will be part of your cash flow. Unfortunately, you can’t include invoices as cash flow because you cannot leverage these funds at this very moment.
Cash flow is so important because it allows you to:
· Pay your debts
· Make payroll
· Invest in your business
Money comes in and goes out of a business quickly. If you’re extending credit to customers, you’re starving your cash flow. The cash that you have available that is truly liquid will empower you to make smarter decisions.
But it’s crucial to not assume that cash is profit.
Many businesses turn a profit yet have no cash. Profit is an accounting method to see how much you earned this year versus expenses. On the other hand, cash is what helps you pay your bills.
When calculating profits, a business will often include accounts receivable, but this goes back to the concept of invoices. Accounts receivable are yet to be collected, so you’re owed money but don’t have the cash to use for spur-of-the-moment opportunities or to invest in your business.
Tips For Managing Your Cash Flow
Managing cash flow is a crucial part of business, and the first tip we have is to use apps for Xero, or any accounting software you use, to generate cash flow statements. These apps save businesses a lot of time while also offering real-time cash flow statements.
When you have real-time cash flow data, you know the exact cash your business has and can make smarter decisions as a result.
Here are a few tips for managing cash flow better:
1. Control your inventory. Are you buying too much stock? If you have inventory that goes unsold for long periods of time, this ties up cash your business would have otherwise had to make other investments. You can use inventory management solutions that can help you grasp your inventory, when you can expect it to sell, and alert you when it’s time to order more merchandise.
2. Accounts receivable. Customers will take advantage of credit terms that you extend to them. If you don’t have a collection process in place, you need to add one today. The goal is to put processes in place that allow you to follow up with non-payers, accelerate payment and worry less about tracking down people who don’t pay their invoices.
3. Client relationships. Which client relationships are profitable, and which are costing you money? Sometimes, you’ll work with customers or clients that are very slow to pay or take up too many resources. If you don’t drop these clients, the relationship you maintain with them will negatively impact your cash flow.
4. Automate. Apps and software can help you automate the cash flow statement process. You can use these solutions to rapidly generate cash flow statements and reports. When you have cash flow data at your fingertips through automation, you can make smart decisions faster.
When your business is conscious of your current cash flow, it’s possible to make better decisions and continue growing your business. Often, businesses that lack a full understanding of their cash flow end up making costly decisions.
But with the tips above and the right software solution, you can master cash flow at any stage in your business’s operations.