In the U.S., 28 million small businesses account for 54 percent of all domestic sales1. Why is it, then, that only about 50 percent of businesses survive at least five years2? While the failure of nearly half of small businesses can be attributed to many different factors, one leading factor might just be poor cash flow management.
With expenses that can fluctuate monthly – from payroll to utility bills – and sales that can go through the ups and downs of the business cycle – knowing your business’s ability to meet financial obligations is paramount. The best place to start? Understanding cash flow management.
While it may be simple to track cash going in and out of your company, you must have an understanding of the patterns behind both positive and negative cash flow in order to accomplish your financial goals. It’s important to note that while positive cash flow is a good indicator for your company, it does not necessarily mean that your business is profitable. In fact, some businesses struggle because of that assumption alone – thinking that when sales are up, cash flow is automatically up as well. In reality, cash flow depends on many different factors that come together to make up your overall financial statement.
Five steps to managing your cash flow
- Find the right banking partner. Your relationship with your business banker should be ongoing – you need him or her when things are good and Being proactive and finding a banking partner who has your best interest in mind can make a difference when things aren’t going as planned. Ongoing conversations with your banker about your global financial outlook –your personal and business financial statements – can help you better manage your cash flow and avoid any potential issues.
- Track your cash flow over a period of time. To manage your finances effectively, you must look at the big picture. This may uncover sales cycles and cash inflows or outflows you weren’t aware existed. A complete understanding of your company’s financial history is key to avoiding future shortcomings.
- Look beyond your checkbook. One of the biggest mistakes that business owners make when it comes to cash flow is that they judge it solely based on what the checkbook says. Additional items to consider include:
- Upcoming bills
- Deferred payments from customers based on earlier sales
- Upcoming orders that count toward sales in upcoming months
- The price that you are charging for your product or service
- Manage a negative AND a positive cash flow. It’s important to know that you can manage a positive and a negative cash flow. When you have a positive cash flow, your banker can leverage his or her knowledge to recommend the best move for your excess funds. Perhaps it’s putting you into contact with a financial advisor, or providing advice on how to provide these returns to your employees. When you have a negative cash flow, your banker can provide you with the tools to support your business financially – potentially in the form of a loan or line of credit.
- Take a long-term view of the future. For business owners in the service industry, especially, it’s important to understand what’s forecasted beyond just the immediate future. Understanding economic expectations for the next 12, 24 or 36 months can help determine when business owners may need to anticipate a positive or negative cash flow.
The good news for businesses is that getting started on improved cash flow management is as easy as reaching out to a business banker. Armed with your financial statements, you can start the conversation by making sure that you understand what you need to know about your situation. Then, you’ll be ready to have a meaningful dialogue with your banker to make sure that you are ready to face the future.