One of the biggest concerns for many of the entrepreneurs I mentor is effectively operating cash flow. Operating cash flow is key to running a successful business. But not many people have a firm grip on cash flow concepts and practices—which makes it almost impossible for a business to function effectively or remain afloat.
So how do you effectively operate cash flow?
Here are some basics to get you started.
Cash Flow Basics
Simply put, cash flow is the movement of money pouring in and out of a business. Or in other words, all the cash a business earns vs. all the money it spends. For accounting purposes, cash flow is measured over a specific period of time.
Cash flows into a business from a few different sources such as customers, investors, or loans. A positive cash flow is when you have more money coming into your business than is being expensed. This is a telltale sign of a healthy business. Positive cash flow helps you sustain daily work activities, hire employees, buy equipment and develop new products and services—all the things that drive growth and profits.
On the other hand, companies that experience cash flow issues are usually struggling to break even and are often sliding into the red. Business owners need to be weary of continuing this negative trajectory. It is imperative they identify the source of the problem as soon as possible so they can correct course and get in the black.
Healthy Cash Flow
Every organization should strive to have a healthy cash flow. A positive operating cash flow will make it easier for companies to function on a daily basis, as well as in the long-term. Moreover, cash is liquid, and greater liquidity means greater flexibility and stability for businesses.
Here are some tips to generate healthier cash flow:
- Tighten up your invoicing procedures to ensure more timely payments. Also, consider less generous payment terms.
- Take out a line of credit at your bank to help cover any temporary cash flow issues that may arise.
- Establish procedures for collecting delinquent debts.
- Avoid withdrawing any unnecessary funds. Reducing your withdrawals by even a little can have a significant impact.
The Net Result
Without positive cash flow, it is virtually impossible for companies to meet their financial obligations and goals. Persistent cash flow problems will potentially derail your business and thwart your long-term success.
This is why it is critical to stay on top of operational cash flow issues. If you are struggling to do so, consider working with a mentor with experience in the area so that you can master operating cash flow and have a thriving business.