How to Make Your Cash Flow Faster
Cash Flow is critical to sustainable business success. It is the lifeblood of the business. Too often you hear about companies that show profits and yet still fail. Why? Because they encounter serious cash flow issues that strangle their business. Even in times when the cost of borrowing money is the lowest it has been in years, robust cash flow management is important and will alert you to trouble well before it strikes.
In addition to being the lifeblood of the business, cash flow is one of the most important elements in assessing the value of a company. Bankers, investors and prospective buyers are interested in how much cash the business is generating today and future cash flow potential.
Understanding the fundamentals behind how cash comes in and out of your business is critical. There are many variables that affect cash flow beyond your collection and payment practices. I encourage "Holistic Cash Flow" management with my clients, since there are many areas of the business that affect cash flow.
Implementing The Wholistic Cash Flow Model
The first step I recommend is to: know your cash gap. The cash gap is the time lag between your outflows of cash to purchase goods or services and the inflow of cash for the sale of goods or services. You first need to understand this so you can work to reduce the gap and have a plan in place to address it.
The second step I recommend is developing a cash flow forecast: Begin with looking historically to see what your monthly inflows and outflows have been. Consider what you are planning for the future and have reflected in your budget in order to build a cash flow forecast. Be clear on the assumptions you are making in your forecast. Look for historical patterns or trends that have affected your past cash flows.
This exercise alone will uncover areas to improve your cash flow. I regularly uncover processes that can be changed or tweaked to help reduce cash shortfalls at this stage.
The third step is having Cash Flow Improvement plan. There are seven main areas in your business that can affect cash flow and offer you opportunities for improving it:
- Sales and Credit Terms
- Costs, Expenses and Systems
- Credit Management Process and Practices
- Purchasing Practices
- Inventory Management
- Investment and Capital Expenditures
- Financing and Options
Reviewing each of these areas and the impact they can have to your cash flow is part of the Holistic Cash Flow Management I recommend. Review each of these areas and develop a cash flow improvement plan:
Make Cash Flow everybody's business because there are very few areas in your business which do not have a potential impact to it.
What can a business owner do?
- Know your Cash gap
- Develop a Cash flow forecast
- Set up a Cash flow review process
- Develop a Cash flow improvement plan
-by Eloise Pasianotto CMA, MBA is a Certified FocalPoint Business Coach
Cash Flow reporting and management is a critical Best Practice in every business.
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