We’ve written about it before: Cash flow is king.
But “cash flow” is also one of those terms that’s constantly thrown around business and banking circles, because it’s assumed that everyone knows what it means. And by extension, it’s assumed that as a business owner or operator, you’ll recognize when cash flow problems might be looming, and know what kind of action might get your company back on track.
In the event that your knowledge of cash flow management could use some freshening up, here’s a quick guide to becoming a cash flow expert.
What is Cash Flow?
Cash flow is defined as the movement of money into or out of a business during a particular, defined period of time.
Every dollar coming in or going out of your business can be placed in one of three cash flow categories.
- Operating Cash Flow. As its name suggests, operating cash flow measures cash flows (positive or negative) that result from your company’s operating, or day-to-day,business activities. Short- and medium-term revenues (sales) and expenses (payroll, rent, supplies, etc.) are analyzed to calculate operating cash flow.
- Investment Cash Flows. This measures cash received from the sale of long-term assets, or the cash outflow that results from purchase of a long-term asset. Long-term assets often consist of equipment and machinery needed for a business to function.
- Financing Cash Flow. Financing cash flow represents cash received when your company issues debt or equity, and cash paid out in the form of interest payments, dividends, or stock re-purchase.
Generally speaking, your company should always strive to maintain positive cash flow. Early-stage companies, which are still burning through investment capital while trying to generate significant revenue, are exceptions.
Also, established companies, during difficult economic periods or when they’re investing large amounts of money into new projects, can experience negative cash flow.
Why Cash Flow – and Expert Cash Flow Management – is Important
So why are banks, accountants, and other number-crunching types so hung up on cash flow calculations? It comes down to two “Ps”: practicality and positioning.
From a down and dirty perspective, positive cash flow means you have enough money in your company’s bank accounts to pay its bills. You can have the greatest product or service in the world but, if you run out of money, it doesn’t matter.
Here are three quick tips for improving short- and medium-term cash flow.
- Time Your Payments. Ask suppliers about possible discounts for early payments. Even a couple of percentage points from a few vendors over a year can bring huge savings.If they don’t discount, it makes sense to pay your obligations – even tax bills – as late as possible without incurring late fees.
- Consider Leasing Equipment. Leasing, instead of buying, equipment can be an attractive option for companies that don’t want to tie up too much capital at one time. As most leases don’t require down payments, your business can obtain the equipment it needs without substantially impacting its cash flow. Leases are also appropriate in cases where equipment must be upgraded on a regular basis. You may also be able to deduct lease payments as a business expense. Check with your tax advisor.
- Use Invoice Factoring. An invoice factoring company like MP Star Financial can not only get you your money from your receivables much faster than the 45 to 60 days it often takes for your customers to pay, but can also reduce costs associated with accounts receivables, collections, and expenses tied to late payment penalties and non sufficient funds charges.
As your company grows, you will likely need additional capital to grow and expand. A history of solid, positive cash flow statements will position your company as an operation that can manage future obligations pertaining to the new capital (debt service, dividend payments, etc.).
In addition, if you ever decide to sell your company, one popular method of business valuation (and this is often dependent on the industry) is to multiply net (or positive) cash flow by a particular number or multiple. The greater your net cash flow, the higher the value that could be applied to your company.
Having cash flow problems? MP Star Financial’s invoice factoring services can make your company’s cash flow more predictable, allowing you time to run your business and grow your company. Call MP Star Financial for more information at (800) 833-3765, extension 150.