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Cash flow is simply the flow of funds into and out of a company. The cash flow statement is the essential summary of the cash coming into a business including sales, collecting accounts receivable, investments, and loans. And it reflects the funds going out of a business including accounts payable, operating expenses, payroll, sales and marketing expenses, and loan repayments. Cash is a current thing, not a yesterday thing, and not a tomorrow thing. As American businessman and author Robert Kiyosaki stated, “I’m a cash flow guy. If it doesn’t make me money today, forget about it.”

Why it is Important to Manage Cash Flow Carefully

Every business relies on cash flow. As Neil Blumenthal, Co-Founder and Co-CEO of Warby Parker said,
“For better or worse, cash is the oxygen of your business, and you can’t last long in any environment without it.” Positive cash flow is required to pay employees so that they can keep working, pay suppliers so that they provide the goods and services needed to operate, pay creditors to preserve the ongoing status of the business, protect against over-buying and over-hiring, and enable business growth and expansion.

How to Keep Current with Cash Flow

Here are three keys to keeping current with cash flow:

  1. Develop a cash flow forecast and review it every week. A typical cash flow forecast covers a calendar quarter or 13 weeks. Adjust this forecast when changes dictate doing so.
  2. Keep a close dialogue with your bookkeeper or accountant, sharing information about changes and discussing any actions needed to manage cash coming in and cash going out.
  3. Secure a working capital loan or line of credit to prepare for any unexpected changes in revenue or expenses and to protect against seasonal or unanticipated fluctuations.

In developing a cash flow forecast, it is important to:

  • Be realistic with the numbers. Don’t be overly ambitious with sales estimates.
  • Accurately project the timing of accounts receivable.
  • Anticipate the payment of quarterly and annual bills and any variations in employee payroll and bonuses.
  • Anticipate the payment of all taxes (and pay on time.)
  • As actual numbers are recorded, compare the projections to actuals and revise future projections accordingly.

Ways to Improve Cash Flow

  1. Lease, don’t buy. This will enable smaller incremental payments. Additionally, lease payments are business expenses and can be deducted for tax purposes.
  2. Offer discounts to customers for early payments, thus accelerating cash inflows.
  3. Do customer credit checks to protect against late-paying or non-paying customers.
  4. Use a buying cooperative when possible to secure better purchasing terms.
  5. Improve inventory practices so that over-ordering doesn’t take place and over-stocked goods don’t sit idly in inventory.
  6. Send out invoices promptly and accept electronic payments.
  7. Negotiate lower supplier rates.
  8. Employ higher interest rate accounts for savings.
  9. Increase pricing. It is okay to experiment to find the level of pricing that customers see as a good value and that optimizes company revenues.
  10. Budget carefully. Stop unnecessary spending and watch for any spending practices that seem to be getting out of hand.
  11. Doggedly follow your cash management plan.
  12. Work concertedly on increasing sales.

Get Expert Financial Assistance That You Can Rely On

Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting and financial assistance that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.