Money coming in, money going out — that’s what gives life to any business. But effectively managing cash inflows and outflows doesn’t happen without strong intent and conscious planning. Let’s look at the most important considerations for creating and maintaining strong cash flow.
Follow the full sales cycle
The success of virtually any company depends on two cycles. From an operational point of view, the first is the sales cycle — that is, how long it takes your business to 1) develop, purchase or otherwise acquire a product or service; 2) market that product or service; and 3) eventually close a sale and collect the accounts receivable.
Indeed, collections — from clear, accurate invoicing to using bank lockboxes for faster access to money — is a major aspect of cash flow management.
Many companies either underestimate the impact of the selling cycle or lose sight of its gradual expansion. The former problem often affects start-ups: Entrepreneurs may believe they can get their wares to market, close deals and collect on them more quickly than reality allows.
The latter quandary, losing sight of the elongation of the sales cycle, can affect even well-established companies. Regular customers may start taking longer to pay. Or a major buyer might jump ship and be harder to replace than expected.
Manage the disbursements cycle
The second cycle is the disbursements cycle. This is the process of managing the regular, outgoing payments to employees, vendors, creditors (including short- and long-term financing) and other parties. As payments go out, your cash flow is affected.
The selling and disbursements cycles aren’t separate functions; they overlap. If they don’t do so evenly, your delayed cash flow can create a crisis. That’s why it’s critical for business owners to understand the interaction between the money being spent to generate revenue and the revenue actually being generated.
That is, just as you work to match revenue to expenses, you also should ensure that your selling cycle (cash inflows, including outside financing) at least matches your disbursements cycle (cash outflows). Ideally, you’re converting sales to cash more quickly than you’re paying expenditures — thereby strengthening cash flow.
Account for everything
As your selling and disbursement cycles roll along, your company generates data. Failing to process this information completely and accurately could lead to cash flow confusion — or worse.
That’s why, if you’re not leveraging the power of today’s financial software, you’re leaving yourself vulnerable to the whims of fortune. At a minimum, your accounting system should allow you to enter common transactions such as logging cash receipts onto deposit slips, cash disbursements onto checks, and purchase and sales transactions onto orders and invoices.
From there, review your use of ledgers. Every basic accounting system has a general ledger. But you may need a system with multiple subsidiary ledgers and special journals that simultaneously post when documents are saved.
Report generators are also critical for managing cash flow accurately. Your system should allow you to readily generate accounting reports — daily, weekly, monthly and annually. This means being able to easily record and access recurring transactions as well as accounts payable aging and payment scheduling.
Today’s accounting systems also can provide you with a “dashboard” of real-time information, so you’re less likely to be caught off guard by cash flow influencers. In addition, budgeting tools can help you set and monitor budgets, perform “What if?” analyses and compare actual results to goals.
Use your financial statement
The data gathered and generated by your accounting system eventually needs to end up in your financial statements. Yours should factor in the cash inflows and outflows of daily business operations, asset purchases, sales proceeds and financing activities. Because it excludes noncash accounting items, you can use it to pinpoint cash flow problems.
And once you have accurate financial statements, be sure to use the information they provide to help make any necessary adjustments as you move forward.
Strong and steady
Changes in commercial trends, dips in the economy and problematic customers all threaten to slow the stream of cash and compromise your business. But diligent management and accounting techniques, such as those mentioned above, can help cash flow at your company remain steady and strong.