3 Essentials for Successful Cash Flow Management

by Craig Anthony

2 min read

No business is immune from cash flow problems. A younger business might underestimate sales cycles or receivable time frames, or it could overestimate inventory. Any business could experience a cash flow problem following an unexpected downshift in the economy or a growth spurt that leads to a cash crunch. The chances of surviving any of these common predicaments are low for businesses that fail to take cash flow management seriously. Successful business owners know it is not enough to simply work at getting more cash coming in than going out. Growing businesses need to stay focused on the key essentials of cash flow management.

Know Your Business Variables

The true test of effective cash flow management is how your business reacts in the face of any number of variables – expected and unexpected – that can impact cash flow at any time. It’s easy to prepare for some of the predictable patterns, such as seasonal shifts, inventory cycles and monthly sales fluctuations, all of which can be built into a 12-month cash flow projection. However, there are many variables that can come from nowhere, such as new or increased competition, a sudden business opportunity, the loss of a key employee, changes in vendor relationships or the loss of a major customer. Build a three- to six-month cash reserve, or have a reliable lending source in place. Always work on your relationships with vendors and customers, and have a constant finger on the pulse of the market.

Anticipate the Future

A growing business will reach critical junctures in the various stages of growth that can become obstacles without proper planning. Without a firm grasp of projected spending needs and cash flow, your business can run into a cash crunch when you’re trying to ramp it up to the next level. Many businesses rely on financing or investment to get there. However a lender will want to see that your business can hit cash flow and profit milestones over a certain period. In anticipation of the need for capital, manage cash flow based on 12- to 24-month cash flow projection. Share the projection and a business plan with a lender long before the need for capital arises.

Monitor, Measure and Adjust Frequently

Monitor your cash flow data monthly to identify any problematic trends on both the revenue side and the expense side of the ledger. Key indicators such as slowing receivables, erratic expenses, uneven payables or increasing costs will show up on the bottom line as either an anomaly or a trend. Compare the monthly data against your cash flow projection benchmarks. If the business doesn’t meet a benchmark, take action to counter the deficit and make an adjustment to the cash flow projection. Develop the habit of questioning your projections and your assumptions to make sure you don’t overestimate the inflows and underestimate the outflows.

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