Randy J. Elder, CPA, P.C.

Cash Flow is King

We all know the saying Cash is King. While that saying has endured and still has its merits, in the world of small business, I offer up a slight variation that I believe is equally important; Cash Flow Management is King. In my work with small businesses I often see owners put their focus on the top line, growing sales, but lack an equal attention to cash flow management and net cash balance. While growing sales and profits is important, a business that is increasing its sales and turning a profit can still run into trouble if it is not also effectively managing cash flow. Ever wonder why that busy place in your neighborhood went out of business? In many cases they were bringing in adequate sales and making a profit but ran into cash flow trouble. In fact, more businesses fail from a lack of cash flow management than from a lack of profits. Most small businesses are undercapitalized making cash flow management a critical element in building and maintaining a successful business.

The basics of cash flow management

At a simple level, cash flow management is the process of forecasting and managing your inflows (cash from operations, loans, lines of credit, asset sales) against your outflows (business expenditures, loan payments, business purchases). Effective cash flow management allows you to cover your business expenses and get you through fluctuations or variances that occur in your sales. When it comes to cash flow, it’s the timing of inflows versus outflows that is the real key.

When cash flow management is critical

In the Phoenix area, many small businesses are involved in the services industry and, due to the influx and outflow of population based on our pleasant weather in the winter and extreme conditions during the summer months, are subject to seasonal variations in their operations. For these businesses, effective cash flow management becomes even more critical.

Another common scenario that can make cash flow management even more important is when a business is growing rapidly. This might seem counterintuitive but often rapidly growing companies are burning through cash either on labor or materials or both faster than they are getting paid. This can turn into a cash crisis if a business is not closely managing their cash flow and cash balance.

Six tips for better cash flow management

If you’ve read this far I hope you are now convinced that cash flow management should become one of your key priorities, if it isn’t already. To help you get started or up your game when it comes to managing your cash flow, I’ve provided a few tips below. These should be helpful to all small businesses but particularly well suited for businesses that are subjected to seasonal or other types of fluctuations in sales and expenses.

Plan, Plan, Plan. It may not be your favorite activity but putting together a good budget that includes cash flow projections is essential to good cash flow management.

Always invoice immediately. Especially when your business is going through its slower periods it is important to be diligent about getting invoices out promptly. Try to get a percentage of the invoice paid up front. Another option available to many small businesses is to leverage the latest technology. If it makes sense for your business, technology such as mobile card readers, electronic invoicing and photo card readers can help you shave significant time off your receivables.

Negotiate flexible payment terms. If you’ve been in business awhile and have established a good reputation, capitalize on this and negotiate flexible payment terms from suppliers. This can help you to cover the gap between when you make purchases and when you will realize the revenue tied to those purchases.

Diversify. This is always a good business practice but especially so for those with seasonal fluctuations or those who are dependent on 1 or 2 big customers. For seasonal businesses, look to expand service or product offerings that can help to stabilize revenue during your slower periods. For those dependent on a few large customers, build your customer base to protect against the sudden loss of a key customer.

Establish short-term access to funds. Short-term loans or a line of credit can help get you through those slow periods and ensure you have enough cash to cover operating expenses. Of course, it is best to secure this before you actually need it.

And back to planning. Use slow periods to review, revise and update your business operation plans, forecasting and budgeting. And don’t forget to review your cash position weekly.

If you have any questions about cash flow management, please get in touch by sending an email or giving me a call.

About Randy J. Elder CPA, P.C.

With nearly three decades of professional experience in public accounting in Phoenix, Randy provides his tax and accounting expertise to new and small businesses in Phoenix Arizona in a casual and friendly environment. Before founding Randy J. Elder, CPA, P.C., he held various positions with an international accounting firm, and with regional and local CPA firms. Randy earned his Arizona CPA license in 1988, and holds a Bachelor of Science degree in Accountancy from Northern Arizona University.