There truly is one thing that changed our company’s finances for good: cash flow. Cash flow not only changed our finances, but it granted us some breathing room in the day to day grind of entrepreneurship. But let’s start at the beginning! You may be wondering, what is cash flow? Or maybe you know what the concept is, but you don’t know why it will truly help your business, or you don’t know how to implement it. Have no fear! Today, we are going to take a simple approach to understanding cash flow, along with some tips and tricks for how to implement it. You will be on your way to less worry and more cash in no time!

What is cash flow

When I say, “cash flow,” what comes to mind? Is it dollar bills falling from the sky? Is it an endless stream of cash flowing OUT of your accounts as you grow your business? Whatever it is, I’m here to tell you that when managed well, cash flow can transform your business for the better! Cash flow is, by definition, the total amount of money being transferred into and out of a business. This means that all your invoices to clients, as well as your payments to vendors for equipment or raw materials, are all part of cash flow. So why is this important? Cash flow has a direct correlation to the liquidity of your business. Liquidity is simply the availability of cash.

Let me ask you a couple of important questions:

1. How easy is it for your business to make a needed purchase?
2. How much cash would your business need to have if all payments to it were stopped right now?

Thinking critically about these questions will help you understand the importance of cash flow for your business.

How can cash flow help your business?

Cash flow can do wonderful things for both your business and you! Let’s start with your business. Implementing a cash flow process can give your business the cash it needs for strategic investments and emergencies. If an opportunity to invest in a piece of machinery comes up, or sales have skyrocketed and you need more inventory to sell to customers, but you don’t have enough cash to make the purchase, the opportunity may pass you by. During COVID-19, sales for many companies stopped almost overnight. Companies with solid cash on hand were able to float the period of unknown while we waited for the world to open back up. That doesn’t mean it wasn’t hard, but they were able, through good cash flow management, to stay open and survive the pandemic. Businesses need cash to keep going. It’s ultimately that simple.

How can your business cash flow help you?

Cash flow for your business is obviously very important. But what will this do for you? If you are like me, this business is your baby! You would do anything for it to succeed. Well, for starters, positive cash flow (the business makes more than it spends) can be a relief for an owner or founder. You don’t have to work around the clock, constantly worried about how you will pay your bills that month. You are able to focus, make clear decisions, and be free from the stress of running out of cash. Good cash flow management can even give you the ability to get paid more! Talk to your accountant before you do this, but paying yourself a profit distribution from your business is also another incentive for good cash flow management.

How do I implement cash flow management?

I’m so glad you asked! To be honest, this took me a long time to truly implement into our companies. It looks a tad different for every company. To truly get to good cash flow management, it is going to take some structure and discipline, but I promise, it is worth it! Here are some tips on how to start:

1. Plan ahead (forecast)

a. Planning your expenses for your business (including savings for unknown expenses!) is so important for optimizing cash flow. This will let you know exactly what revenue you need monthly to keep the company in a positive cash flow. Figure out when you may need to make large investments, and ensure weekly payroll is included in your plan. For revenue, plan based on your industry. Do you make cash every day (like a restaurant), or do you have payments spread across a few months (photography)? This will help you see your month over month cash flow. Check out this guide to learn more!

2. Collect payments promptly

a. This one sounds trickier than it is. Simply ensure that payments made to you (the accounting term is Accounts Receivable or AR) are as optimized as they can be. If you have the ability to be paid sooner for your services, you should be. This has a lot to do with the industry, but find the acceptable industry standards that maximize the cash in your door!

3. Optimize bills

a. Along with accounts receivable comes accounts payable! The business needs to spend money to make money, right? Optimizing this spend by spending at strategic times, or spacing out payments, can greatly improve your cash flow. Make sure you are getting value out of the money you spend. This will help the business stretch its cash!

In conclusion, your business needs cash flow management. Ensuring that your company can invest and grow when it wants to, as well as pay bills and expenses when it needs to, is something every entrepreneur should at least be aware of. Optimizing that process can eliminate worry for not only your business, but for you!