By Alvin E. Terry, MBA
Business Consultant, Dynamic Business Builders
Cash flow is the life blood for any business. You can have cash flowing through your business, but the lack of cash flow management is the essential ingredient for your survival. Cash is essential for growth. Cash is essential for the daily maintenance of any on-going business concern. The efficient use of cash is as important as your customers.
Without using the cash in-flows wisely, it can lead to untold nights of sleeplessness. Believe me, I have experienced those nights being an entrepreneur myself.
Entrepreneurship is not a destination; it is a constant process that has its ebbs and flows that will out-live you and your business. Operating in a capitalistic environment where “cash is king,” we all strive towards that same goal. That goal is to stay “solvent” at all times, whenever and wherever possible. It does not matter if you are a one person operation or have hundreds of employees, the focus of the owners and the stake holders are the same, protect the bottom line and show a profit.
Your cash flow management efforts should be to seek the most rapid conversion of your receivables and inventory into cash. You have to be diligent in understanding the efficient use of cash. You have to take control of your cash-flow by exercising positive cash flow management. This can help to reduce the disruptions that will surely occur and assist in maintaining the continuous cash flow that is necessary to grow your business and remain profitable.
Realizing that positive cash flow management is an important “profit center” in your business is the first step required to start on the process of taking control. Working with an Accountant, they can explain the difference between cash accounting and accrual accounting and the effects that it can have on your available cash to operate. Don’t get caught off guard with cash on the books and actual cash in the bank. Sometimes you may have a backup plan by filling in the gap with external financing such as lines of credit, an additional investment, or perhaps considering accelerating the collection process of your accounts receivables.
Don’t get caught in a position of financial embarrassment because of a sudden cash flow squeeze. “Leverage,” always consider your cash alternative options that are available to you. At times, the firm may have to take a proactive approach and use its receivables as collateral for a short-term loan. It may have to consider factoring. Not anticipating growth with extra expenditures can create a cash flow liability that can outpace realized cash income and prevent a company’s expansion. You should add the balance sheet to the income and cash flow statements as the fundamental tools for your cash flow management tools. Without external financing, accounts payable could fall so far behind payments that suppliers could limit your credit lines which would prevent your company from filling orders or administering services.
Always consider the cash flow process is a profit center in your business. The cost of capital, bank debt, bridge loans, mezzanine financing, hard money loans immediately impacts your bottom line in the way of reduce profit margins. As we say in the business, it is the cost of doing business. Interest expense is real. You may write it off on your income taxes at the end of the year, but someone else is claiming your expense as an income and a possible profit for them.
Understanding your limits of cash capability in the cash flow cycle of your business can give you added protection in avoiding a cash flow crisis. All businesses go through cycles that may not be perfectly balanced, but understanding the larger view of managing and focusing on your cash can help you rest at night. Minimizing surprises because of having the correct knowledge and capacity to act accordingly can guide you and your company to growth and prosperity.
Employing the techniques that are recommended to manage all of the components that will affect your business individually and collectively will require a more in-depth prospective which cannot be covered in this article. Most importantly, being aware of the importance of cash flow management can help guide your company through tough times and avoid financial ruin.
Once again it has been a pleasure to bring to you valuable information that get you thinking in the right direction which can ultimately save you time and money! Good luck and be prosperous.
You may contact Alvin E. Terry, MBA @alvin.terry@rocketmail.com or by Cell @ 713-392-9107.
