Cash flow Questions worthy Your Consideration

Cash flow is vital to the health of your business, one saying goes “revenue is vanity, cash flow is sanity, but cash is king.” What this means is that while it may look better to have large inflows of revenues streaming in from sales, the most important focus should be turning these into cash inflows.

Many businesses tend to handle short and medium term credit sales, say sale on 15 to 30 days credit or 60-90 days credit. This becomes very comfortable were you can delay payments to your suppliers or you have enough capital to settle you variable costs. However no business can survive long without steady and convincing cash to meet its immediate needs.

Follow conversations between CEOs in large organizations with their CFO, the common question is “do we have enough cash for this …… then can you arrange for back up funding from………” this kind of conversation should not be the case in your small business or start up. You need to know first hand since you are most likely the CEO/CFO/Owner.

 "Every small business owners should be able to print a profit and loss and balance sheet statement any time and calculate cash flows right now when need arises."

If you find yourself wondering if cash flows is so vital – always remember cash is king and it’s the number you should be following on a daily basis.  Now how do you develop in to a cash flow freak for the sake of your business? Ask your self and your accounts team these questions frequently.

1    1.       What is cash or cash flows?

Cash and cash flow are not the same thing, according to the English vernacular Cash refers to money in the physical form of currency, yet in business its current assents comprising currency or currency equivalents that can be accessed immediately or near immediately for payments. In our case we will call it the petty cash in office and balance at the bank.

Cash flow on the other hand is the movement of money/cash into and out of the business in a given period of time. Now if you can track this movement, you will realize at end of period you paid out more cash than you received (Negative cash flows) or you received more cash than you paid out (Positive Cash flow). Now watch if your company is profitable on paper (statement of comprehensive income –income statement has it used to be called) and yet maintaining a negative cash flow for an extended period of time, this might drive to out of business faster than completion or anything else could. 

Being able to calculate and monitor your cash flow position regularly is critical to your business existence. 

2    2.       Are we looking for cash flows in the right places?

When you ask yourself what your cash flow position looks like and you do is draw out your latest bank statement, just know you are fishing out the wrong figures. Your business bank balances shows your cash on hand. It will never show you what your cash movements are or more importantly how to improve it.  Now you need to look for were you spending money, who is paying you and who is not paying yet they should be. When you are well grasps with that, and then you can manage how fast you should be paid.

3    3.       Are we relying on estimates?

Estimates are you used for planning purposes, don’t rely on them when you are analyzing your position and looking for solutions. Then comes the trap formula of simply taking your bank balance then adding all your sales and projected sales and labeling them as cash inflows, then subtracting all bills and other payments you make or may make within the period then claiming you are projecting cash flows, simply put this is suicide because some might be credit sales and worse so some credit clients will never honor their agreed payment period, by the time you realize its wrong it may be too late. 

4   4.       Are you waiting for your bookkeeper to tell you your cash flow position?

When you find everyone else and most especially you depending on one person your accountant for this position, know the situation is already bad and you don’t need weeks or months to realize things are not right and you cant pay bills or payroll. Some people will call you mad and they may be right.

Every small business owners should be able to print a profit and loss and balance sheet statement any time and calculate cash flows right now when need arises. 

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By Andrew Ekwang. Business writer with Business Solutions