Cash Flow: Things I Learned the Hard Way


The cash flow equation is really simple: Money in, minus money out, equals X. The ‘X’ factor is perhaps the single most important factor in determining whether or not a business will survive the first quarter, let alone the first few years. If ‘X’ is positive then the likelihood is that the business will survive; if it is negative, sadly the converse is true. Even a profitable business may not survive its own success if the cash flow is negative because the growth cannot be paid for.

In order to manage the money in the bank, it is vital to do a cash flow analysis. This will identify possible shortfalls and therefore allow the business owner to take remedial action before it becomes a problem. It also allows for informed business decision-making. A potentially profitable contract may require the kind of funding that the business owner is simply not able to provide or leverage. Only a well-considered cash flow analysis will provide the insight needed to walk away from a deal that could sink the business or alternatively, provide reliable intelligence with which to approach an investor or banker. It is always easier to ask for money before it is needed.

In simple terms, a cash flow analysis is based on projections of:

  1. Accounts receivable: What customers owe the business.

  2. Accounts payable: What the business owes to suppliers.

  3. Shortfalls: When B is greater than A. This is inevitable in most businesses but the key is to predict, minimize and work towards a positive result.

These projections are based on the sales and financial plans for the upcoming month, quarter or year. A predicted increase in sales is automatically going to increase expenditure and possibly require capital investment. More sales require more raw materials, more equipment, more employees etc. Mastery of the ABC is more important than showing a paper profit. Invoicing a customer for products or services creates revenue but actually collecting the money into the bank account creates cash. Cash will always be king.

Tips on improving cash flow:

  1. Collect money in quickly and efficiently, at the same time, delay paying money out as long as possible. Many small business owners are under-staffed and the paperwork is usually the first ball dropped. A delay in invoicing means a delay in getting the money in the bank. Poor oversight of receivables results in customers inadvertently receiving credit terms. Do not fall into the trap of giving ‘free loans’ to your customers. Make the payment process as easy as possible.

  2. Credit is the enemy. Seek cash up front or C.O.D customers where practical and impose strict terms & conditions for granting credit if necessary. Incentivize customers to pay early with carefully costed discounts or rolling payment terms which spread the risk. Reward quick paying customers with loyalty points or value-added products. Require deposits on large or custom orders. Customers will push back and demand more favorable terms but always start with the best case scenario.

  3. Stock on the shelf is at the expense of cash in the bank. Carefully monitor slow-moving lines or outdated inventory and sell it off quickly. A reduced profit margin on ‘dead stock’ is a small price to pay for a positive cash position.

  4. Monitor expenses carefully and constantly seek to reduce. Negotiate favorable terms with suppliers and pay only when an amount is due, not a day before. (It is important to pay as per the due date in order to maintain good relations, but rather have the money gaining interest in the business’ account, not theirs.) When cash flow is a problem, a history of being in good standing will make it easier to approach a supplier for leeway.

  5. In the event of a shortfall, be strategic about which bills are paid first. When it is not possible to make all the payments due, the rule is: employees first, followed by key suppliers (this should include landlords who are notoriously unsympathetic - lease contracts usually have draconian penalties and termination clauses). Negotiate extensions or better terms with the rest of your suppliers and agree on a payment plan.

Key take out: Cash is the lifeblood of a business, knowing the projected cash flow for next week or next year and planning accordingly, is key to staying alive.

Author: Janet Askew


Janet Askew

Janet is a trainer, coach, speaker and writer who is passionate about promoting women in business and SMME development. In addition to her consulting work, she is a director of Essentially Natural and serves on the board of the Wot-If? Trust.




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