While many business owners and entrepreneurs have a good grasp of the importance of sales and profit, they may not understand why it’s essential to stay on top of cash flow. Understanding operational cash flow is essential for businesses to run efficiently and decrease outstanding debts. For example, even a business has a high profit margin, it can still have low cash flow. This can lead to overspending and other financial problems.
Learning best practices for analyzing and improving operational cash flow can put your business on a more solid financial footing. To help, below 14 members of Forbes Finance Council share their top tips for business owners.
1. Educate Yourself On Cash Flow And Its Impact
Cash flow is the essence of every business, and its inflows and outflows impact every decision you make. It sounds dramatic, but note that if you run out of cash, your business will stop—like a light without electricity. Cash flow will affect product pricing, customer payments, employee and vendor compensation, and more. A solid grasp of this will help you grow a healthy business. - David Kelley, Mailprotector
2. Look At Sales Versus Cash Flow
Cash flow is money that comes into the business through sales and money that goes out to pay for expenses. One lesson for new business owners is that more sales don’t always mean better cash flow; as sales increase, expenses increase as well. Growing businesses often get strapped for cash even with strong sales. That’s when an injection of working capital can make all the difference. - Luz Urrutia, Accion Opportunity Fund
3. Do A Weekly Cash Forecast
Make a habit of doing a weekly cash forecast that stretches out 13 weeks. You will have much better control over your liquidity and can prioritize among activities generating both inflow and outflow to ensure you’re not caught off guard from a cash flow perspective. - Anders Fohlin, Medius
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4. Keep Updating Your 13-Week Forecast
We like to encourage business owners—especially those who are starting out—to create a 13-week forecast for cash. Each week, update the forecast based on what happened the previous week and extend the forecast window by one more week. In this way, you can keep a close watch on exactly what’s coming in and going out so you can be more proactive in addressing potential cash crunches. - William Lieberman, The CEO’s Right Hand
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
5. Reduce Variable Costs
Maintaining adequate income is necessary for survival, and increasing it is the key to growing your business. One way to mitigate risk is by reducing variable costs to reduce cash outflows. When labor is a significant cost, consider reducing spend to avoid situations where layoffs are required. Instead, reduce contract labor and redistribute work among your permanent workforce. - Minal Babaria, KB Tax Deviser CPAs
6. Use Your Cash Forecast To Identify When To Seek Financing
Cash flow is critical for obtaining financing and growing your business. By accurately managing inflow and outflow, business owners can forecast cash and identify the right time to look for financing. When financing is required, it’s important to look for innovative partners with responsible terms. This may not be a traditional bank or financial institution but instead a payment processor or other partner. - Bernardo Martinez, PayPal
7. Build Residual Revenue Through Diversification
Cash flow can often get away from you. With events becoming part of our business, we are forced to stay away from the trap of paying for next week’s event with next month’s event money. Thankfully, diversifying into products or services that create residual revenue can help offset any shortsighted hiccups where cash flow risk is prevalent. - Justin Brock, Medicare Gurus
8. Develop Multiple Sales Channels
Over-reliance on one stream of income or cash flow can end up being a major risk to a business—as has been seen with Covid, which has had a very uneven impact on the economy. Companies with diversified customer bases and multiple sales channels have much more enduring strength than those that are reliant on one large customer or channel. - John Ward, Bridge Investment Group
9. Develop Projections For Multiple Scenarios
Knowing your numbers inside and out is essential. Cash flow can be quite turbulent for new businesses. Successful business owners find it helpful to develop financial projections for multiple scenarios. Revisiting projections regularly allows business owners to better predict cash flow trends and over time helps them optimize cash flow management. - Jenn Flynn, Small Business Bank at Capital One
10. Build Your Own Forecasting Tool
Consider building a cash flow forecasting tool. Many expenses are recurring or a flat percentage of revenue. Cash is king in your business, and before you tie it up in additional inventory or unnecessary liability payments, use your forecasting tool to project your current cash on hand so you can make good decisions and decide whether you can afford a new capital purchase. - Meredith Moore, Artisan Financial Strategies LLC
11. Stay On Top Of Actual Expenses Versus Your Budget
Stay aware of company expenses and how they are tracking against a budget or forecast. I am all for spending more money to make more money—within a certain level of risk tolerance. Continuously monitor your loan availability or credit line, as it is a useful tool to grow your business. Growing too fast may require you to build inventory to meet higher demand. It is a cash flow trap that can seem counterintuitive. - Dave Sackett, Visibility Corporation
12. Sync Accounts Payable And Accounts Receivable
Business owners must truly understand what drives cash flow. This means properly syncing the payable and receivable sides of your business. If your business relies heavily on spending money to make money (such as through online marketing), then you have to make sure that your customers have a shorter “net” payable, with the understanding that if they pay you quicker, you can provide more products or services. - Lilit Davtyan, Phonexa Holdings, LLC
13. Be Aware Of Industry Trends On Receivables
The percentage of outstanding accounts receivable versus revenue billed is an important metric for staying on top of cash flow. Knowing your consistent trend and how it compares to industry standards will tell you how effectively you are converting billing into cash. A rising accounts receivable trend should be an immediate cause for concern and investigation. - Katherine Jackson, Bayer Properties, LLC
14. Track Your Days Sales Outstanding
In typical business cycles, growth consumes cash, making it critical to understand Days Sales Outstanding. DSO is a metric that calculates the number of days that pass between a customer being billed and collecting their cash payment. It is an indicator of when cash will naturally flow into the company. Not understanding this metric has landed many entrepreneurs in a cash-strapped position, stifling growth. - Jennifer Eubanks, CPA Department
