As a business owner, there are several financial concepts that you need to understand and effectively manage for the well-being of your company. The cash flow of your business is one of those concepts. When you have cash on hand it can allow you to put money into the growth of your business and provide a buffer against unexpected expenses. If you are intentional about managing your cash flow you will have more options when opportunities or problems present themselves. Below are three things you should know about managing your cash flow.
Profit and cash flow are not the same
It is easy to think of profit and cash flow as interchangeable terms, but they are not the same. Profit is what you have left over when you subtract expenses from your revenues. Cash flow is simply the cash you have moving in and out of your business. A major difference is that you count revenue as profit at the time it was earned but it does not impact your cash flow statement until the money is collected.
The distinction between profit and cash flow is significant because it is possible to be a profitable business without having much cash on hand. Both numbers are important in helping you make informed decisions and understand the financial well-being of your business.
Stay on top of receivables
As mentioned, receivables represent profit but do not represent cash until they have been collected. You can increase your cash on hand by being diligent about collecting the money you are owed. One way to do this is to incentivize your customers to pay receivables in a timely fashion. For example, you can offer a ten percent discount to any customer who pays with an automatic bank draft for repeat purchases. In addition, you can develop a system for collecting receivables so nothing falls through the cracks.
Find a balance between growing your business and maintaining cash flow
We have all heard the quote by Plautus, ‘You must spend money to make money.’ There is some truth to that quote, but in order for your business to succeed you must find a balance. Cash on hand will allow you to put money into efforts to grow your business. However, if you put all of your available cash into growth you may run into problems later. Increased growth often comes with increased expenses-inventory, employees, space, etc. If you put all of your cash into growth efforts you may not have the additional cash needed to take care of any increased expenses or financial emergencies.
Managing and understanding the cash flow of your business is not overly complicated but it is important. Whether you do your own accounting or hire help, do not neglect this aspect of your business. Properly managed cash flow can give you the freedom to focus on the growth and continued success of your business.