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5 Steps to Manage Cash Flow

One of the primary challenges we see in working with growing small and midsize businesses is managing cash. The simple reality is growth can burn cash, so a healthy P&L can accompany poor cash flow. Businesses don’t fail when they lose money, they fail when they literally cannot pay their bills – and even when utilizing outside capital such as equity partners and banks, without properly managing cash, long term viability in a growth mode can be very difficult.

There are however a number of steps that growing companies can take to better manage cash flow.

1) Have a planning mindset – No different than managing a personal budget, a business has to dictate where its cash is going. Be intentional and don’t make a decision unless you know you have the cash to spend.

2) Cash Flow Forecast – Forecasting cash is essential and one best practice is a 13 week forecast. By laying out expected inflows and outflows, this allows visibility to make sure that a cash flow decision tomorrow won’t result in an unexpected cash crunch down the road.

3) Conservative estimate on collections – A good billing month does not necessarily mean collections are great as well. And a decline in collections can cause chaos in a business. There is no crystal ball, but a conservative approach to collections when forecasting can help mitigate a crunch. Don’t just look at your standard customer terms, but under what terms do you actually collect for a customer/line of business? Use historical averages, and maybe pull back from there even a little to be safe.

4) Plan for infrequent expenses – The recurring expenses that pop up every month are fairly easy to predict, such as payroll, rent, etc. Not so are quarterly or annual expenses or onetime purchases that arise. A good best practice is to reserve cash monthly so that when a big payment comes up, the cash is “saved” to manage it without disrupting everyday business.

5) Have cash reserves – Plan for a rainy day. Disruptions in business are real – maybe a key customer delays payments or there is a disruption in your supply chain and cash is locked up in inventory. How many days can your business continue to operate with available cash on hand? If the business has little to no cash reserves, part of that cash flow forecast should include saving a little each month to build one.

Proactive management of cash can be the difference in allowing a growing business to survive and thrive. With it, there is flexibility, strength and a sleep at night factor for a business owner. The absence can easily stall growth, or worse.

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