Cash is a critical element for a business to get right. Cash flow – the coming in and going out of cash – is often called the “lifeblood of success,” and rightly so: At the end of the day, a business cannot succeed – or survive – if it doesn’t have cash, regardless of how much revenue or profit it may have on paper.
Cash flow is important for all enterprises, but it can be especially so for startups and small businesses, as success in the earlier years can have an outsized impact on setting the stage for growth. Smaller business may lack resources relative to a large company to cover any short-term lapses in the moving of its money. The 2019 “State of Small Business Cash Flow” study by Intuit says 61% of small business regularly struggle with cash flow and 69% small business owners have lost sleep due to concerns about cash.
As an entrepreneur, you may personally be responsible for managing cash flow. If not, you as a business owner or in a leadership role will still need to understand cash flow and how it impacts the business. Here we discuss some key points that business leaders should know and ensure in order to better manage their cash flow.
Get the Big Picture
Getting an overall view at how your company’s money moves is one of the first things you can do to better understand its cash situation. Study cash flow statements and forecasts – create them if you haven’t yet (see below for more on budgeting and forecasting). Observe the timing and levels of cash inflows and outflows, which can help you gauge how efficiently the business is converting sales into cash and how it goes about netting real profit rather than just on paper.
It’s also important to understand the rhythm of your company’s cash flows throughout full annual cycles. This means factoring in seasonality, particularly for businesses such as those in retail that see income streams connected with different times around the year. Understanding which months of the year the business might see better or leaner cash inflows will provide time to plan and help management identify any areas of concern and work toward resolving them.
Set up favorable payment terms and cash collection processes.
One way to make cash-flow management more efficient is to negotiate for more advantageous payment terms with vendors. Most vendors provide some time for their customers to pay invoices – typically 30 days. You should take advantage of these terms and negotiate so that you end up with the most favorable payment schedules possible. Often times this means paying on the due date and not a day earlier.
On the flip side, you should utilize resources to collect cash as fast as possible. Unpaid invoices can be an important factor in cash flow. Some ways you can better manage this process include invoicing promptly and offering a discount for early payment to incentivize customers to pay earlier. It would also help to know how your clients prefer to pay – perhaps they pay through payment apps or use direct deposit – and set up your accounts appropriately to minimize any technical glitches.
In addition, the Intuit survey mentioned above shows that nearly two thirds of small businesses said the time it takes the money to process after receiving a payment has the biggest impact on their cash flow. Using online payment systems could cut down time, as money can be directly deposited to the company’s bank account.
The key, in short, is to pay as late as possible and collect as early as possible.
Budget appropriately and set aside cash reserves.
Budgeting is an important aspect of business management and a key means to take control of sales targets, expenses and cash flows. We’ve discussed forecasting before in this blog. Business forecasting is not an exact science and can be done in different ways to best suit each company. Nevertheless, it’s a key aspect in maintaining a holistic view of the company and managing it for the future.
In budgeting, it is important to set aside some sort of cash reserve. This may be difficult if you’re concerned about not having sufficient cash in the first place. But it would be a prudent practice, as a cash cushion can provide liquidity and help smooth over any fluctuations in sales resulting from seasonality or in challenging one-off situations. Even if no problems occur, having a reserve can be beneficial as owners and management can focus more on the business rather than worrying about emergencies. The amount to keep on hand will vary by company, but a typical recommendation would be enough to cover three to six months of business expenses.
Be mindful of cash during times of growth.
Small businesses must take a strategic approach to growth and keep in mind how rapid growth can affect cash flow. Growth sounds great, but growing pains can come with it as expenses grow, too. As you gear up for growth, be sure to iron out any issues that may lead to larger problems. Having taken the aforementioned actions, for example, may prove helpful in a season of fast growth. Perhaps you might also consider raising capital.
Business owners need to understand that having sound management over cash flow is imperative to its survival and success. You may be well served to keep reliable advisers who have specific expertise in relevant industries and can offer customized service and value tailored to your operations to help navigate your growing business efficiently and strategically.
Mr. Lieberman is the founder and CEO of The CEO’s Right Hand, Inc., a New York-based consulting services firm that provides the full breadth of strategic, financial and operational advice to founders, CEOs and Executive Teams. As an experienced entrepreneur himself, he has served in various C-suite leadership and advisory roles across a wide spectrum of industries.
His first venture was CMR Technologies, a FinTech company based in San Francisco serving the investment management consulting space. From CMR, Mr. Lieberman formed Xtiva Financial Systems, a software company specializing in sales compensation solutions for the financial services industry. Mr. Lieberman served as Xtiva’s CEO, building the company to over $10 million in revenues and 100+ clients. He also served as the President and CFO for Interactive Donor, a New York-based Benefit Corporation which incentivizes charity through rewards.
Mr. Lieberman holds double Masters degrees, one in Business Administration and the other in Computer Science from the University of California at Los Angeles. He completed his Bachelors in Computer Engineering from the University of California at San Diego.