A mistake many entrepreneurs make when starting out is confusing profit with cash flow. And that causes problems. So, let’s start by answering the question, ‘what is cash flow?’.
A simple definition from Investopedia states: “The term cash flow refers to the net amount of cash and cash equivalents being transferred in and out of a company.”
Note the use of the word ‘net’.
What is Cash Flow to Me?
Having access to cash is vital for any business. A profitable enterprise can die if the flow of cash slows or stops. A struggling company can continue as long as money continues to flow, perhaps from investors or owner funding.
This may seem obvious, but too many people look at their profits and think they are doing well. They have no understanding of how cash moves through the business and what impacts on that.
Too many, especially at the start of their business journey, want to enjoy the profits and don’t plan for the future – to grow or mitigate against downturns.
Yet we know that a change in one factor – such as fuel prices, staff costs, or supplier bills – disrupts your cash flow, threatening your productivity, output, and profit margin.
It is vital, however successful you think your business is, to have a firm grasp and understanding of what is cash flow to you, how cash moves through your business, and what can impact upon it.
What is Cash Flow Management?
Once you appreciate how cash flows through your business, what you need to spend, what you earn, when, and what would happen if any one factor changed, you are in a stronger position as a business leader.
The next step is to manage that cash flow. Below I list some simple steps you can take to ensure cash continues to move through your business, even when times become challenging.
Cut Costs
It seems obvious, yet many business leaders forget to review regularly what they spend on overheads. Keep your spending under constant review and, when possible, make necessary cuts. This may include office rent, IT management, staff costs, or electricity bills. If you are spending cash you don’t need to be at that moment, cut back.
Make More
Again, this seems obvious. If you want more money going through your business, generate greater profits. You may think it is easier to say than to do, but there are simple things you can do to increase your profit margin. For example, negotiate lower supplier costs or look elsewhere, monitor wastage and review order levels, update processes for greater efficiency, and don’t give away your company’s time or products for free.
Review Accounts
If you need more money going through your business, your accounts processes should be kept under constant review. For example, ask if your suppliers will give discounts for prompt payment or if you are being hit with late payment penalties or interest without realising. You could also seek payments in advance of work, for example, deposits or staged payments. To keep the cash flowing in, you should also make it easier for customers to pay you, so review and streamline your process. In fact, your entire accounts process should be as hassle-free as possible, whether you employ a bookkeeper or use digital accounting software like Xero.
Debts and Grants
If your business has debts, are rising interest rates hitting your cash flow? In early February, the Bank of England hiked the base rate to 4%, the 10th increase in a row. This may have increased the repayment costs to service your debts, impacting your cash flow. Are lower rates available elsewhere? Could you accelerate repayment to reduce the total interest due? You should also invest time researching what grants and tax relief may be available. There are many government schemes designed to assist small businesses and start-ups that you could be missing out on.
Look Ahead
Monitoring is central to what is cash flow management. It will identify issues and solutions with where your business is right now. However, you need to be looking ahead. Alongside your financial plan, create a cash flow forecast to see where pinch points are coming. It is better to know about rocky times ahead and plan for them than to live in blissful ignorance until the cash dries up.
What is Cash Flow Marketing?
When you look at your cash flow, the money going out and coming in, you may be looking for ways to make cuts. Many businesses are seeing profits drop and costs rise and are looking for ways to make savings.
Often, one of the first casualties is marketing spend. It is not central to delivering your product or service, like staff and supplier costs are, and it is not a fixed and essential overhead, like rent. It is an easy cut to make.
But…
I have seen many businesses spiral into failure after slashing marketing spending in a desperate bid to manage cash flow. Customers forget about them, competitors steal their business, and they stand zero chance of growing their customer base.
My final piece of advice for what is cash flow sanity relates directly to marketing.
Sell More
If you need more cash coming into the business, increasing sales is an obvious step. So, research ways to generate more leads, increase conversion rates, enhance customer referrals, and boost customer retention, spending, and frequency. Your sales team can do some of this, but they will be greatly assisted by clever, cost-effective marketing that builds brand awareness, finds new customers, and demonstrates your value to all customers. It’s not easy, especially in competitive sectors, but if you cut marketing, it is, bluntly, impossible.
Conclusion
So, what is cash flow care going to do for you? You need to understand how much money is coming into the business, from where, and when. You must know how that money is being spent.
That basic understanding allows you to review where income could be enhanced and costs reduced, sharpening your competitive edge and improving your profitability.
And then you need to plan ahead. We cannot predict every challenge or opportunity that will arise, but forecasting your cash flow alongside your financial plan will help you be prepared.
