89% of businesses fail due to challenges with cash flow.
Cash flow is the lifeline of any company. In this article we walk you through some basic concepts of cash flow and how it relates to your business.
Cash flow can effect your business in many different ways. Most commonly we see the following three challenges:
Getting customers and work through the door. Some companies struggle with managing schedules and getting work completed timely, others have a hard time getting work through the door at all.
Some companies have no problem getting cash in through the door, but how that cash leaves the business can have crippling effects.
The time spent waiting for invoices to be paid and taking on new projects can limit the company's ability to grow.
In this article we will help you understand cash flow, what to look out for, and what you can do as a business owner to mitigate challenges.
What is cash flow?
Cash flow is the total amount of money being transferred into and out of a business, especially as affecting liquidity.
To simplify, cash flow is the actual money going into and out of a business. Most business owners associate cash flow and revenue as the same, but they are very different.
Cash Flow Vs. Revenue
Revenue is the amount of money going into a business. Revenue coming in can be based on a cash or accrual basis, which makes monitoring cash flow extremely critical.
For example, you bid a project for $1,000. You win the bid and are hired to do the project. You are able to successfully complete the project with labor costs around $300. You request payment from your customer, putting your accrual revenue at $1,000, your cash revenue sits at $0 (because payment has not yet been received), and your cash flow is -$300 due to labor costs. If your customer takes 30 days to pay their $1,000 invoice, all the expenses you incur from the date the invoice was sent until it was paid, will negatively effect your cash flow. Your cash flow will not become positive until the receipt of your payment.
Without proper cash flow, it is impossible to stay in business.
There are two major areas where we see problems with cash flow:
Your employees and your customers.
Your employees are your most expensive asset as a company. If employees are not bringing in enough cash for a business to support their wages, the business will sink financially.
But what if the employees are bringing value, but customers are not paying on time? Just like the example above, this can be financially stressing on a business.
Three Types of Cash Flow
Operating cash flow is the amount of cash generated by a company's normal business operations. Operating cash flow measures a company's ability to generate sufficient positive cash flow to maintain and grow its operations.
How much cash has been generated or spent from various investment-related activities. Investing activities include:
purchases of physical assets
investments in securities
sale of securities or assets
Cash flow financing is when a loan is made to a company and is backed by a company's projected cash flow. This type of financing is used for company's that do not have applicable assets suitable for collateral on a loan.
How does cash flow effect decision making?
If you read our article on Opportunity Cost, you will understand that the ability to take on an opportunity to better your company can be directly effected by your cash flow.
Having a thorough understanding of your cash flow, and how to maximize it will give you access to better opportunities for your company.
How do I improve my cash flow?
To improve cash flow, a business must focus on the timing of incoming and out going transactions. If it is not possible to have a customer pay an invoice in a timeframe that will allow the business to remain positive, the business must find alternatives. There are many ways to improve cash flow at a small cost, for a minimal time commitment, and even for free.
Alternatively, a business can also decide to push payables to a timeline that aligns better with the receivables timeline. With this method, it is important to consider the impact on relationships, possible fees, and other negatives that can come from rearranging the payables schedule.
You're not alone on your business journey. Galaxy Consulting Group was founded to help business navigate the road to success and keep business operations running smoothly! Think of it like this; your business is like a vehicle, and you are the driver guiding it toward success. Most drivers don't always make great mechanics, who know how to keep their vehicle operating at its best. Our team of professionals (mechanics) help you maximize your business potential to keep you on the road to living your vision of success.
Check out our website here to learn what our team is about or schedule a time to meet with one of our team members below!