Cash Flow 101 for Small Business Owners

Why learn about cash flow?
It’s often said that cash flow is the life blood of a business.  It’s certainly true that if you run out of cash, you’re out of business, because you can’t pay your bills, and you have nothing to invest in future revenues.

How do you know if you have a cash flow problem?
You know you have a cash flow problem if you’re stressed about waiting for customer payments, meeting payroll, covering daily expenses, paying taxes, achieving production goals, or adequately serving customers.

A better way to know if you have a cash flow problem is to do projections ahead of time so that you can deal with the problem in advance.

What’s the biggest problem in managing cash flow?
There’s a time lag between when your customers pay and when you have to pay all the expenses of the business.  That can put you in a very hard place.

What’s the most important principle ofcash flow?
Always know your cash balance.  That’s not the same as your bank balance.

What’s the second most important principle of cash flow?
Always know your projected cash balance in the future—next week, next month, next six months.  This is a lot of work, but it’s essential to manage your cash balance to prepare for cash flow difficulties.

What is a cash flow projection?
It’s an educated guess as to when customers will pay their invoices and when the expenses of the business must be paid.

Doing projections requires gathering information, asking questions, and doing research.  So, it’s hard work.  But accountants say projecting cash flow is as important to your business as your business plan and your marketing plan.

If you’re doing it for your own small business, you’ll need to set up a spreadsheet with the time periods you will cover.  Note how much cash is available at the beginning of the period being analyzed.  You’ll need to predict customer payments and other sources of revenue and when they’ll be received.  Second, list all business expenses and when they must be paid.  The difference between these two groups of items is your projected cash balance for a given time period.

What if the difference is negative?
If the difference between revenues and payments is negative, you have evidence of a cash flow problem.  Negative cash flow must be overcome, or it will eventually lead to bankruptcy.  Solutions to explore include cutting expenses, changing customer payment terms, better utilizing vendor payment terms, selling assets, and borrowing.  Any of these can reduce the difference between current assets (i.e., revenues) and current liabilities (i.e., expenses). 

On the asset side, there are these specific options:

On the liabilities side, these options may be used:

How can factoring improve cash flow?
Factoring is the sale of accounts receivable to a third party like AmeriStrength at a discount— less than face value — for immediate cash to run your business.

Invoices you’ve issued to customers for products or services are valuable.  They’re like IOU’s from your customers.  Like any asset you own, you have the right to sell invoices to someone who will collect the amounts due.  This gives you cash immediately, and you can use it for whatever you need.

Customers may take 15 to 90 days to pay, but your business needs cash now.  To keep your business growing, you need money to pay employees, suppliers, lenders, or others.  You need what’s known as working capital to keep your business running.

When you factor your receivables, you are selling them.  You are not assuming debt.  Factoring is not a loan; it is a sale.  You are not restricted in how you use the proceeds of that sale.

Factoring is used by businesses of all sizes.  A typical business might have ten to twenty percent of its annual sales tied up in accounts receivable at a given time.  AmeriStrength pays cash for your accounts receivable.

Contact AmeriStrength to AccelerateYour Cash Flow Today!