Managing cash flow is a challenge for all businesses. It does not matter if you are an old-line industrial company or a tech startup, cash is king and you need to constantly manage your cash position to make sure you have enough money on hand to pay for operations. If your cash outflows are more than your inflows, then trouble is soon to follow. As such, here are some reasons why managing cash flow is important for your business.
Your Business Can’t Survive without Cash Inflows
Without cash inflows, your business will die. I can’t state it any simpler than this. This is called negative cash flow and few companies have survived prolonged periods without money flowing in.
Cash inflow includes moneys from investments, interest income, sales, and loans. Obviously, not all inflows are the same. Cash inflows from investors or loans have strings attached must be repaid eventually.
Sales are the best form of cash inflows out there. Think about it, your customers are giving you money and if your cash flows are properly structured then you will be able to hold on to some of that cash.
However, there are times when sales are not enough. Maybe you are growing too fast or your business is seasonal and there are times when sales drag to almost nothing. Either way, you need to a plan to account for where your receivables are coming from. This way you will know in advance when something is wrong or when you need to adjust further down the line.
You Should Watch Cash Outflows Like a Hawk
You guessed it, outflows cover the money you use to pay for raw materials, bills, loans, and even your investors. If you want to achieve positive cash flow, then your outflows should be less than your inflows. This is the best way to make sure you have enough cash on hand at all times.
However, there are times when even positive cash flow is not enough. Maybe there is an opportunity to gain more market share and you might need additional working capital. At times like these, you might need to turn to investors or even a lender to get you the additional cash you need at the time.
While the initial payment will represent a cash inflow, remember that you will have matching cash outflows to pay for that investment or loan. As such, you want to make sure that your cash flow plan takes into the account of repaying any investors or loans.
Get a Plan
Managing cash flow does not happen by itself. You need to have a plan to manage cash flow and that plan needs to include how you will balance cash inflows and outflows. If the balance is correct, then you will achieve positive cash flow.
When making a plan, you need to start with your baseline. This is an old consultant’s trick. It basically means looking at past performance to model where you are today and, importantly, where you are likely to go tomorrow. From there you can identify which corrective actions will have the biggest impact on your cash flow.
If you are just starting your business, then you won’t have much of a baseline to go off of, but don’t worry. Having a cash flow plan in place from day one is important as it will help you highlight which steps you need to take to ensure you make the most of the cash you have on hand.
Being a startup is not easy. You have to simultaneously find customers and investors and there is never enough of both. The constant struggle often means that business fundamentals get lost in the shuffle. But having a plan and treating every dollar as a precious resource will serve you well. So, get a plan and make it happen.
Managing cash flow is important. You can be profitable, but if your cash flow is not right then you are bound to run into trouble. Look at your cash inflows and your cash outflows and then come up with a plan. If you are a startup, then don’t worry about past performance. Begin with your projection and make corrections as you go. The most important thing is that you are paying attention to your cash flow to make sure you don’t run out of cash.