Cash Flow represents the amount of money being transferred into and out of a business over a designated period. Cash Flow is, by most accounts, the #1 indicator of the relative financial health of a business. Unfortunately, a lack of sustained positive cash flow is the #1 reason businesses fail in the first 5-10 years of their existence. A deep understanding of the factors impacting cash flow and strategies for managing cash flow is needed to avoid financial disaster, as has been the case for many small businesses impacted negatively by the COVID pandemic.
A strong cash flow position assures that a business can be sustained over the long-term, through the natural highs and lows of the typical economic cycle. The primary advantages of strong cash flow are higher profits, speed in the pursuit of opportunities requiring cash, and greater flexibility in financial decision-making (you’ll also sleep better at night). Unless a business is highly leveraged or capitalized, cash flow from operation for most small businesses is the primary concern.
There are 5 ways to improve Cash Flow from Operations.
- Improve Net Operating Profit
- Reduce Capital Expenditures
- Reduce Accounts Receivable
- Increase Accounts Payable
- Reduce Inventory
Considering the high level of uncertainty arising from the external forces acting on businesses today, small business owners would be well advised to strengthen their cash positions going into 2022. Businesses that are expecting to be tight on cash at any time or wishing to improve their cash flow position during 2022 should consider deploying any or all of the following strategies.
- Identify all “sources” and “uses” of cash from operations, investing, and financing areas of the business
- Prepare a 12-Month Cash Flow projection for 2022 (or, a 13-Week Cash Flow projection if you are expecting to be tight on cash)
- Establish and regularly monitor key metrics of Cash Flow, weekly to monthly
- Identify strategies to improve cash flow from operations, investing and financing and act decisively to make needed improvements
- Consult with your CPA and Banker for cash flow as circumstances dictate
Be encouraged to contact your Coach for more details and for the tools needed to improve Cash Flow during 2022.