This seems to be the battle cry for many small businesses and small business owners. I think many owners are surprised when I tell them that they have very good cash flow! They look at me with a puzzled expression, as if to say, “You must be on something stronger than coffee!”
No, I’m not on anything stronger than coffee.
Here’s what I tell them:
“You have great cash flow: it flows into your front door, across your desk and out the back door very quickly. You have cash flow. You don’t have cash retention. It’s flowing through your business. You have a lack of control over the flow.”
So the challenge becomes, “How do I get better control over my cash flow?”
Let’s start by looking at the actual definition of cash flow. There are several definitions listed in Webster’s and other sources, I chose this one for discussion purposes.
DEFINITION of 'Cash Flow'
- A revenue or expense stream that changes a cash account over a given period. Cash inflows usually arise from one of three activities - financing, operations or investing - although this also occurs as a result of donations or gifts in the case of personal finance. Cash outflows result from expenses or investments. This holds true for both business and personal finance.
To gain control, it is necessary to understand the real problem or problems with cash flow. For our purposes, let’s add another word to cash flow. Let’s call it a Cash Flow System.
Instead of thinking of cash flow as a singular issue, let’s approach it from a systematic problem or issue. Like any system, cash flow has many different components to its system. Each component has many different factors that can affect that particular component of a cash flow system.
It’s always interesting when owners believe it’s a singular problem with a singular solution. My standard answer, when an owner asks me what is affecting his or her cash flow, is “everything”. Let’s look at a few of the items that could materially affect your business’ cash flow:
- Cash & Collection Processes
- Product or Services Pricing
- Debt Load
- Fixed Overhead Expenses
- Variable Overhead Expenses
- Financial Controls or Lack Thereof
- Terms from Your Suppliers & Vendors
- Macro Market Conditions
- Micro Market Conditions
- Operational & Structural Management
Basically, anything and everything in your cash flow system can and will affect your cash flow. As you can see, it can be some or all of the issues listed, along with other components that contribute to the system.
What can be done to improve your cash flow system?
It is important to know and understand which components of your cash flow system are contributing to poor cash flow. Remember, we are approaching cash flow from a system mentality and not as a singular issue. Most of the time, owners have some combination of issues that are affecting their cash flow. It is rarely a one solution fix.
Most professionals will simply tell you to raise revenue and lower expenses. Wow, that seems easy enough doesn’t it? What they usually don’t explain is where to start and how to do it within the framework of your individual businesses.
There can be positive and negative things that will happen to the underlying company with each choice or solution you as an owner makes. So understanding both the short term ramifications and the longer term ramifications of your choices and solutions is imperative.
Some owners may believe that raising their pricing will solve their cash flow issues. That makes sense doesn’t it? That would produce more revenue wouldn’t it? Yes it would, unless you already have the highest priced products or services in your particular market area. Maybe higher pricing would cost you accounts that you already have and actually reduce your overall revenue. Companies raise prices on products and services all the time and in most cases, it’s a normal part of business. This example is just one of many potential choices owners have. There are many factors to be reviewed before you make changes to your pricing and raising prices is just one component of your cash flow system.
You can start to get a feel for all the information and components you are really dealing with, as it relates to cash flow. Unfortunately, too many owners try to solve cash flow problems with knee jerk management. It usually creates more problems than solutions.
After you feel you have a better idea of which components are contributing to the poor system, you can begin to address potential improvements to your cash flow system. Your collection process could be another example contributing to your cash flow issues. If you’re A/P is greater than you’re A/R, that situation is obviously going to create great pressure on your cash flow. But, in many cases, I have seen A/R numbers that are higher than the A/P for a business. You would think that would be a positive thing, and in most cases, it is. However, it really still depends on the aging of you’re A/R. If you have $500,000.00 in A/R and $400,000.00 in A/P, it appears on the surface that you would not have a cash flow issue. If $300,000.00 of you’re A/R is current, $100,000.00 is 60+ days & $100,000.00 is 90-100+ days aged, cash flow is a nightmare. As part of a cash flow system, collections are an extremely important component.
One of the first questions should always be: “What are my collection processes?” Accounts Receivables is a wonderful thing until we are not receiving it. As a business owner, we want to see positive A/R at all times, but the structure and aging is so very important and too many business owners don’t realize it until it’s too late.
The biggest conceptual takeaway from this blog should be the understanding that cash flow is a complicated systemic issue within most small companies. Gaining control requires a comprehensive approach to a systematic problem.
If you would like to speak with us further about your specific cash flow challenges, we offer a complimentary 10-20 minute consultation. Request your consultation.
ABOUT THE AUTHOR:
Terry McGill is a small business consultant and managing partner of Strategic Business Directs. Connect with him on LinkedIn.