It's all about Cash Flow

Updated: Mar 1, 2021

Good financial management is all about cash flow.

You’re an owner and business is moving along well. Revenue is trending up and you are excited to see those numbers growing. However you can’t stop noticing that your cash balance is always surprisingly low. You’d like to avoid taking on a loan and it’s too early to raise additional capital. To complicate matters, the increase in revenue and transactional volume has kept you busier than ever staying afloat with your day to day. With regular ebbs and flows in your business and related costs, you are concerned about your margins, maintaining a rainy day fund, and turning a larger profit to grow your business and financial position. Overall you are feeling vulnerable and craving financial peace of mind.

This is the story we hear all too often and reason why focusing on cash flow is more important than ever, especially in the current economic environment.

We see that our flourishing businesses look beyond upward trends in profits and revenues. They know that revenue growth does not always translate to an increase in cash flow or profitability. Therefore they place a keen focus on their cash position, future cash flows, and achieving sustainable growth. They know it’s important to increase their cash runway to allow them to further invest in their businesses, themselves, and their futures.

Without a steady flow of cash, a company simply can’t survive. Data shows that over 80% of business failures are due to lack of cash. However, these statistics are merely a case of taking your eyes off the proverbial ball, stepping into the box without a plan or sense of what’s coming at you and from where. Superior businesses know how to aim for financial doubles, and avoid the need to constantly swing blindly for the lucrative home run. This allows them to stay in the game, garner attention, evolve as a team, and consistently manufacture runs to put them in the best position to achieve desired outcomes.

4 Steps to increase your Cash Flow:

Create a clear financial picture [Step One]

Tracking your financial activities and organizing them in a clear, concise, and methodical way is step one. Why? Plain and simple, it’s a requirement that all businesses maintain clean books and records if the IRS were to come knocking. However, many business owners stop there. They stop at compliance. At the final hour, they pull together a quick and easy (often error-prone) system for capturing basic income and expense items for lobbing over the fence to their tax accountant. We need to take a bigger stride with this step. An effective accounting and financial management system goes beyond the basic tracking of high-level financial transactions. It should be designed to completely and accurately capture all financial activities and produce relevant data in an organized way that provides extraordinary financial knowledge and insights to its owners and investors. Financial reports such as the Balance Sheet, Income Statement (P&L), and Cash Flow Summary provide powerful information at a top level to wrap your head around assets, liabilities, and equity positions, as well as business revenues, expenses, and profits over a period of time. You’ll become savvy on differentiating between operating, investing, and financing activities of the company and how the business dedicates cash to each one of these areas. You will also begin to understand and guide your business based on key performance indicators that are used to track, measure, and analyze the financial health of the company. These metrics include gross and net profit margin, working capital, current ratio, debt-to-equity ratio, and inventory turnover to name a few. These metrics will guide you in understanding profitability, liquidity, solvency, efficiency, and valuation. This clear financial picture will surface opportunities to save costs on operations, reduce debt and related expenses, and increase throughput of sales. Once you have a good grasp on your current state, you can then project out future business and financial related scenarios to ensure you can weather tough times and capitalize on the good ones. Bottom line: implement and maintain a good accounting and financial system that provides you with the insight of where you stand, where you want to be, and a road map to get there. Consider an Advisor or Personal CFO who can work with you to expedite the implementation and business growth process.

Implement a sound money strategy [Step Two]

Before you can jump into assessing your numbers and financial metrics, it’s important you map out a plan of where money is coming from and where it is going. Every thriving business has a goal and plan for where they would like to go. This plan is set at the beginning of the year and is revisited on at least a monthly basis. The plan is iterative and can evolve, however not setting initial goals and tracking to those goals often leads to complacency, or sometimes failure, in most businesses. This planning process should have at least two aspects. The first entails the development of a more qualitative business plan on how you envision your business to evolve and initial high level steps to reach your goals and objectives. This plan can include your go-to-market vision and strategy for attracting customers/clients, new or altered revenue streams you would like to focus on, brand presence surrounding the look and feel you’d like to achieve and avenues for showcasing this brand (social media, local groups, email campaigns, etc.), expanding vendor relationships, and a hiring plan to support you with these aspects. However, what’s typically left behind is the planning process around cash flow. This is the second, and highly crucial, aspect to ensuring success. It’s difficult to achieve the first aspect without a clear understanding of how much money you’ll need to reserve for each of these pieces. This is where budgeting comes in. Budgeting is going to be your ticket to cash flow optimization, increasing your cash runway, and getting on a path to sustainable growth and profitability. Budgeting is a core component of your financial road map. Utilizing historical financial trends in your business, and layering on anticipated future state variables, you can set an initial budget and start forecasting out future financial scenarios. This budget takes into account how much revenue you anticipate from all your income producing activities and, of this revenue, how much is going right back out the door towards business expenditures and related costs. The difference will provide insight into the net amount of cash retained on a monthly, quarterly, and annual basis. You’ll be able to budget and subsequently track against these metrics, at both a high level and at the more detailed financial statement chart of accounts level. This budgeting and tracking allows you to understand your anticipated cash position at a point in time, determine how much of your net cash retained you can allocate to various business operating activities, amount retained for busine