We’ve all heard it: Cash is king.  Cash in business is like oxygen for business owners. Without it, a business dies.

I had a client who was profitable every month–some months more than others–but still profitable.  A large growth period, however, consumed all the client’s cash and they struggled to make payroll and vendor payments for eight months. We were eventually able to get additional financing to provide adequate working capital to offset the growth in accounts receivable.  We got a grip on accounts receivable and focused on improving accounts receivable turnover to get back to cash flow positive.  It took another several months to repair the vendor relationships.

On the other hand, I had a client that had been unprofitable for several years, but they had survived based on cash flow from current sales and from reductions in inventory.  Eventually, we scaled the business back, and we were able to get back to consistent profitability.

In both cases we had to face facts: cash flow is vital for survival, and not managing it or predicting it precisely can have devastating effects.

Here are a few tips you can use to help you be an expert in cash flow.

1. Understand it.  Know where your cash flow comes from and where it goes.  Know the cash flow cycle in your business.  Cash receipts are from generally from sales regulated by accounts receivable, and cash disbursements are comprised of cost of sales items, payroll and payroll related costs, and operating expenses regulated by accounts payable and inventory turnover.
2. Predict it.  Using your forecasted operating plan and a simple cash flow worksheet, develop a forecast process with your team.  Update and review on a weekly basis.  See more from a previous post here.
3. Improve it.  Work to improve your cash flow numbers.  Improvement of cash flow comes from sales, accounts receivable turnover, inventory turnover, and accounts payable turnover.  Know your numbers and work to improve each one.  See my resource page for cash flow calculation tools.
4. Protect it.  Consistency in sales and profit helps businesses predict and protect cash.  When our businesses generate extra cash, we need to pay down debt and vendors, and save it.  Excess cash seems to burn a hole in our pocket, and we look for ways to spend it.  We need to think more minimally. What do we really need and what should we invest in for future profits?  When things are good, put cash away for the eventual rainy day. It WILL come.

Get a handle on your cash flow and you’ll be able to breathe easier.

Need some help figuring this out? Contact me.  You may also want to read 7 Keys for Better Cash Flow, available to those who subscribe to my blog.