Cash Flow – Why so Important?

There are over 29 million small businesses in the United States making up 99.7% of all businesses. One third of those will fail within 2 years of starting with only 50% surviving the five year mark. 82% of those small business failures are due to cash flow issues. That’s a staggering number to consider for this common problem. Essentially, this means that if those businesses had better cash flow, they would otherwise still be in business on their way to long term success.

What is cash flow?

Cash flow is the net amount of cash being transferred into and out of a business. In the simplest terms, it’s like keeping your phone battery charged regularly so it never dies or drops too low to fully function. Cash flow for your business needs to function the same way. The cash balances always need to be greater than the maximum expenses to be paid at any given time. In addition, there should be a cushion, or extra amount available to handle unanticipated reasonable expenses.

This sounds like a simple problem, but it can be quite complex. Profits and completed contracts do not equal cash flow. Actual customer payments fuel cash flow. So if your customers are slow to pay or don’t pay, very quickly without adequate cash flow, your business can be turned upside down and struggling to function.

Here’s a few tips to help regulate and encourage cash flow:

  • Growth. Don’t grow too fast. Be careful of using needed cash flow to grow your business too quickly. When making decisions to expand, first determine what money can be allocated without encroaching on normal cash flow. Based on this allocation, set a strict spending budget for expansion including any setbacks and unforeseen problems. Then stick to it. Also, beware of having multiple expansion projects open at once. Expect unplanned expenses and plan them into your budget.
  • Inventory. Product and supply inventories tie up a lot of cash flow. It is tempting to buy up a lot of inventory for simplicity of operations and to capture bulk savings, however, how long will it be sitting until you can use or sell it? The longer you have the inventory, the higher the risk to you. Try increasing delivery frequency and lowering the inventory to the least amount needed to function well, even if the next delivery is late.
  • Communicate. Good communication is vital for cash flow. Communicate up front with customers and clients about payment expectations. Follow-up with them quickly and regularly when payments are missing. When you see a problem coming up with paying your own vendors, proactively reach out to them to see about changing the terms. Perhaps the due date can be moved back 10 days, or maybe the late fees can be waived. Either way, communicating ahead is much better than waiting for them to call you.

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