5 Key Elements of Strong Cash Flow
No business owner wants to wake up on a Friday morning with no idea how they are going to make payroll or pay that mission-critical vendor. That’s why cash flow management is something that needs to be worked on all the time.
Too often when my team talks with small business owners—those with $5 million or less in revenue—about cash management, they view it as a “Band-Aid” product instead of an integral part of the way they do business. We sit down with owners to understand the ins and outs of their businesses and how they can make improvements to achieve strong cash flow. Here are the five key elements we discuss:
1. Projected sales growth. We like to start by talking about growth because strong cash flow is most dependent on a company’s profitability. What are your revenue growth plans? Marketing plans? Is your industry experiencing rapid growth or declining market share?
2. Gross margins. Another critical aspect is managing the cost of the product or service sold. How solid are your vendor relationships? How open are they to negotiation? Is your business hampered by guaranteed prices and fixed contracts?
3. Overhead expenses. This seems like a given for any business, but you would be surprised by how many owners don’t scrutinize their expenses and find ways to keep overhead as low as possible. We typically recommend that businesses use third-party firms that conduct annual audits and market comparisons to make sure they’re not paying too much, duplicating services or being over-billed.
4. Payment and collection systems, including fraud prevention. A good recipe for business success is to buy low, sell high, then collect early and pay late. With today’s technology, you can be billed electronically by vendors and pay them electronically via ACH on the exact due date of the invoice. Most small businesses can’t afford to absorb large frauds or theft, but today’s banking services make it easy to install dual controls and checks and balances to keep that from happening.
5. Capital expenditures and debt structure. Evaluate these decisions carefully. Many times a business is tempted to pay cash, only to find months later that the cash is really needed for operations. The right debt structure can make all the difference.
For more information about each of these points, listen to the full podcast below.
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