By Evan Vitale
Companies are unable to have long-term success if cash inflows are less than cash outflows. That is one of the main reasons that some experts believe that ability of a company to generate cash is a strong indication of the financial health of the company. If a business is spending more than they make, on a cash basis the business is operating at a deficit. Many new business owners know that in order to be successful they need to keep a close eye on the sources and uses of cash, however it becomes increasingly difficult to do so on such a micro level when attempting to launch a successful business.
When thinking about cash flow in general, a business owner ultimately needs to think about the Statement of Cash Flows for financial reporting purposes.
The Statement of Cash Flows is broken up into three types of activities:
- Operating Activities
- Investing Activities
- Financing Activities
When deciding what can be done to be successful in managing cash flow, a business owner must look at those three activities and figure out how they are able to better manage each. Am I spending too much? Should I consider taking on investors, issuing stock, notes? How should I invest my excess cash to generate a better return?
General Tips to Improve Cash Flow
- Prepare a cash plan for business. If you don’t know where you are currently at, it’s hard to determine where you are going.
- Monitor cash flow regularly
- Identify wasteful spending
- Set timely payment polices (negotiate payment terms with key vendors).
- Prepare Statement of Cash Flows on a monthly or quarterly basis
- Timely collection of receivables
- Eliminate delay to invoice customers
In addition to the above, there are many other tips to help improve the cash flow of a business. Just remember, cash is king and without proper cash flow, the business will not survive!
* * *
Connect with Evan Vitale on LinkedIn.