Succeeding in Business: It's All About Cash Flow

You can have the best product, best employees, and most satisfied customers in the world. But if you don't manage your cash flow, your business will not be healthy - let alone last long.

To be successful, organizations need more cash flowing in than cash flowing out; otherwise, the viability of the business is threatened. Cash comes in from a limited number of sources: cash sales, receivables, loans and new investments. However, cash flows out to cover all types of costs. Being unaware of all of those costs, miscellaneous expenses, and depleting cash reserves at the wrong time will negatively impact a business.

The most important skill every business owner must develop is the projection of cash flow. It is the cash flow budget; it illustrates financing needs; and it indicates when to acquire debt or sell assets. Historical data, industry data, and management experience tend to generate better cash flow projections. These help managers prepare for the four major causes of cash flow problems: rising fixed costs, uncontrollable variable costs, excessive inventory and past due receivables.

The principles behind managing cash aren't complicated. Experienced managers often recommend that a business purchase equipment and add staff only when revenues justify the expense, or outsource projects in the interim. Spend wisely; seek optimal value from each transaction. Provide incentives to encourage customers to pay early. Take advantage of discounts offered by suppliers on payables and manage debt responsibly to maintain good credit. Recycling supplies may help the environment and will add to the bottom line over time.

To set up your cash flow management plan, evaluate the business environment, create and execute a plan, evaluate the results against controls, and then adjust accordingly. You'll know you're being effective when costs are justified, sales and collections work together, market share and profits grow, and your business succeeds.

Numerous tools are available through the U.S. Small Business Administration (www.sba.gov) and other sources on the Web. Software programs such as Microsoft Excel also offer free templates for developing cash flow projections.