Proactively manage your cash cycle to protect your business from cash outflows exceeding cash inflows. Allow this to happen for too long because of poor cash flow from operations, and you will go out of business.
Cash flow from operations represents the cash cycle. It is the lifeblood of every business and is particularly vital to any business that lacks vast cash reserves. The most common business struggle with cash flow occurs when the cash going out of the business is at a faster rate than the cash coming into the business. This is the leading cause of business failure.
The start to solving cash flow problems begins with knowing your business Cash Flow Cycle. The business Cash Flow Cycle defines the timing of cash flows in and out of a business. It begins with available cash that is invested in assets, direct costs, and overhead expenses required to generate sales from customer purchases. The payment received from the sales made closes the cash cycle for that sales transaction putting cash back into the business for the next cycle of cash outflows required to generate sales at a profit.
Five critical success factors for improving your business cash flow cycle:
- Issue sales invoices promptly, ideally at the time of delivery.
- Understand the payment terms for your industry to time your A/R terms and A/P practices.
- Manage your accounts receivable (A/R) collections consistently, so people pay you on time.
- Set up favorable payment terms with your suppliers and vendors, so you don’t pay them too soon.
- Ensure your asset investments generate adequate returns to avoid cash outflows exceeding cash inflows.
When your business has cash available, you can pursue options for growth, make investments, and draw from cash reserves (savings) for any unexpected situation or emergency that arises.
What gets misunderstood by many failing business owners is the hard reality that while your P&L Statement might show your business made a profit, your business can still fail whenever you don’t have enough cash cycling through your business to pay your current financial obligations.