Meeting payroll is a badge of honor among most business owners. You know that you are helping each of your employees, and their families, get by. To do this successfully, you need to understand how your business works. More specifically, you need to understand its cash flow cycle. Yes, revenue and profitability are important, but in the end it’s all about cash flow.
Understanding how to manage cash flow can help you run your business better, increase your availability of debt, and allow you to manage your business instead of having it manage you.
Here are a few simple ways to create cash:
A business that pays on time pleases its vendors. But paying too quickly sucks cash out of your business and can make your company look less valuable. Having a controller who pays each bill the day it comes in may actually be destroying value in your company and costing you money. By managing the terms of your bills, and understanding which ones need to be paid quickly or not, you can increase the cash that stays in your business.
Of course, if you’re delinquent you’ll drive your supplier to tighten up on terms, which you don’t want. But paying your bills too quickly, without considering how cash can be managed, doesn’t make sense either. Your controller should be optimizing your business’ cash flow, not writing checks as fast as possible.
Receivables are just the opposite of payables. Collecting them quickly brings cash into your company, while outstanding payments delay cash infusions. Many small business owners deal with much larger companies that pay on a set schedule. Although these receivables can often be financed (depending on their quality), you may want to think about how you can speed up collections. Again, big customers can mean a lot to you, so financing their receivables may make sense. But if you’re able to get paid more quickly, you’ll have more cash in your business.
Turning your inventory means selling through what you have on your books. You need inventory to sell, but having too much, or worse, having it too long, is a cash drain. Industry norms vary widely on how fast inventory should turn (grocery stores turn much faster than airplane manufacturers, for example), but having your company’s cash tied up in inventory that is moving more slowly than that of your competitors drags on your liquidity.
Consider real estate carefully
Business owners often want the certainty of owning their own real estate. Sometimes, it’s just because owning can feel better than renting. But make sure you are ready, and beware of real estate that sucks up a lot of your monthly cash. This can make your business less agile.
In particular, make sure your real estate purchase isn’t too big for your needs. You may think you will grow into that extra space and that in the meantime, subletting will help your cash flow. More often than not, getting into the real estate management business is a drain on the core business.
Your business is valued, and will be valued, by how much cash it creates. Manage your company to avoid cash drains and improve cash creation. You’ll feel better once you’re managing your business, rather than letting it manage you.