Best Methods to Manage Your Cash Flow

Cash Flow ChartWhat exactly is Cash Flow? Is it the same as net income or operating profits?

The primary difference between accounting profits, or net income, and cash flow is the timing of collecting revenues, converting assets to revenues, and the incurrence and extinguishment of liabilities.  A business can be profitable over a period of time but easily experience a negative cash flow in the short-term.  As a result, managing the components of cash flow is a potential business stress point that requires attention.  This article highlights:

o   areas of cash flow management that require on-going attention,

o   the importance of being able to predict or forecast monthly cash needs, and

o   practices that can help maintain a positive cash flow.

First and foremost, a prerequisite to maintaining positive cash flow is to have a profitable business.  Of course businesses can encounter periods of financial loss, particularly during the early stages of a new business, in which case, existing cash balances or equity or debt financing is necessary to sustain the business during these loss periods.  Generally though, a profitable business for the long-term is necessary to sustain positive cash flow. In any case, whether the business is a start-up or a long-term profitable business, it’s important to maintain a rolling twelve-month cash flow forecast. This critical tool not only allows a business to forecast its cash balances, it assists a business in planning its expenditures based on when cash will be available and it helps a business avoid the unpleasant surprise of an unexpected cash shortfall. A cash flow forecast, that is regularly reviewed and updated, is an important practice for a financially healthy business.

Growing your business puts an added strain on cash flow due to the likely investments that need to be made to the business’ infrastructure, or increased marketing and selling efforts that require higher than normal expense levels.  However, the pace of growth is controllable and therefore it’s critical that the planned growth of the business is consistent with the cash flow and funding sources of the business.  While the goal of many businesses is to grow, growing your business too fast can threaten the financial viability of your business without the appropriate cash or funding to support the growth.

Best practices to managing cash flow require the following three essential elements:

o   Maintain, or improve upon, the profit performance of the business.

o   Prepare and maintain a monthly cash flow forecast so that the cash needs of the business can be timed with the cash inflows, or at least highlight months when cash flow shortfalls are expected so that measures can be taken to cover the shortfalls.

o   Optimize the level of working capital in the business to minimize the amount of cash flow trapped in the balance sheet.

Suncoast CFO Solutions provides an affordable solution for small- to mid-sized businesses operating without the role of a CFO by offering part-time CFO services tailored to the needs of the business.  To learn more about improving your business’ cash flow or other ways we can add value to your business, contact us for a free consultation or, for a nominal fee, an in-depth Business Analysis of your business.