Managing Your Company’s Cash Flow

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Cash flow management is one of the most important determinants of success for any business, large or small. It is a fact of business life that should be indelibly embedded in the minds of all owners.
The bottom line is businesses that fail to practice good cash management are unable to compete and forced to borrow money at exorbitant interest rates to stay afloat. Many more have gone out of business because the amount of cash coming in does not match the cash going out.
A study conducted by U.S. Bank found that 82 percent of startups and small businesses fail because of poor cash flow management. Another study conducted by Oklahoma State University found 60 percent of businesses suffer from major cash flow problems. Today, smart cash flow management is more important than ever because customers and clients are taking longer to pay back their loans. It is no wonder business managers worry about how they will pay their employees and vendors.
Cash Flow’s Importance
Countless financial experts and household-name entrepreneurs have pointed out the importance of paying careful attention to cash flow management. The critical message is that the most brilliant business ideas since the invention of the wheel have died ignoble deaths without cash flow management.
“Poor cash flow management is causing more business failures today than ever before,” according to Philip Campbell, author of  Never Run Out of Cash (Grow & Succeed Publishing). Campbell, a CPA, is also a former CFO of several companies.
Why Business Owners Cannot Manage Cash Flow
According to some experts, business owners have a hard time distinguishing the difference between cash and cash flow.
Consider that cash is easily accessible money in the bank. It is not inventory, property, or accounts receivable. All of these can be converted to cash. However, it cannot be done immediately to pay employees, rent, or suppliers.
Important lesson: The growth of your business is not to be confused with having more available cash. Your profit is the money it expects to earn over a specific period of time. Cash is what the business must have available to keep it running efficiently on a day-to-day basis.
It is vital that managers understand profits are of little value if they are not accompanied by positive net cash flow.
Cash Flow Defined
Simply, cash flow refers to the process of moving cash into and out of a business. Monitoring cash inflows and outflows ranks as one of a business owner’s most critical tasks. For example, cash outflow includes the monthly checks managers write to pay salaries, suppliers, and creditors. Inflow includes cash received from customers or clients, lenders, and investors.
According to a Harvard Business Review article about return on management (ROM), another pressing problem is that many owners lack focus and fail to focus their energy on business priorities. In short, they are spreading themselves too thin by expending most of their energy on many projects, clients, and goals.
Typically, owners and managers concentrate all their time and expertise on the most critical business issues, such as providing their customers with cutting-edge solutions. As business grows and offers new products or services and hires more people to meet market demands, owners and managers direct their efforts away from implementing the company’s core strategies and achieving its most important goals. The somber results are the amount of productive organizational energy plummets while the amount of management time invested increases disproportionately. Hence, the company’s ROM is “dismal,” according to the Harvard Business Review.
What is the Solution?
While cash flow should be tracked weekly, monthly, or quarterly, it is important to remember there are two kinds of cash flows: positive and negative cash flow.
Positive cash flow is the cash flowing into your business, from sales and accounts receivable, which often exceeds the amount of cash leaving your business via accounts payable, monthly expenses and salaries. Negative cash flow is when cash flowing out of your business exceeds incoming cash, signaling major problems. However, these can be avoided by taking steps to stop the business from expending cash, and at the same time maintaining or cutting expenses.
Seek Your Accountant’s Advice
This is the time to seek an accountant’s or CPA’s input. Accountants and CPAs have the expertise to guide business owners through the process and help them analyze and manage their cash flow to efficiently control inflow and outflow of cash.
The Small Business Administration strongly advises doing a cash flow analysis to ensure there is always enough cash on hand each month to cover all financial obligations.
On the surface, managing cash flow seems simple. Take a proactive stance and seek professional guidance so that your business does not tumble into a cash flow moat.
Your accountant will tell you profits do not equal cash flow. Many business owners mistakenly think they can monitor their P&L statement and get a handle on their cash flow. Unfortunately, this is not true, because many financial variables feed into your cash flow, such as accounts receivable, inventory, accounts payable, capital expenditures and debt service. Prudent cash flow management requires obsessively focusing on cash drivers in addition to profit or loss.
Contact one of our CPAs for advice. We can assist with realistic cash flow projections for smart business decisions.

Need Guidance and Help?
If you need advice, give us a call and we will be happy to discuss your situation.