Mastering healthy cash flow

Stable cash flow—the steady movement of cash through your company—is essential to maintaining a successful business. If you want to expand your business, you’ll need to fully understand the cash flow cycle. Sustaining a healthy bottom line is dependent upon your ability to use company funds efficiently and boost returns on capital.

Why is cash flow so important?

How quickly do your customers pay you? How long does it take you to put that money to work for your business? These are core factors in your cash flow cycle. Maintain a strong cash position and use your working capital efficiently by focusing on these three cash flow cycle components:

• Velocity – How much time passes between ordering raw materials and collecting payment on your finished product? That’s your cash flow velocity. If it takes 10 days to receive materials from your supplier after processing, 10 days to produce your product, and 25 days to collect payment from your customers, your cash flow cycle is 45 days. You'll have to keep working capital in your business to fund operations that entire time. At that rate, your company is capable of moving through nine cash flow cycles a year. If your sales pick up, you’ll need access to more capital.
• Volume – Gross margin drives cash flow volume. Profits are determined by how well you’re able to manage your direct material and labor costs. Use your working capital efficiently to generate the highest possible profit margin from each cash flow cycle.
• Indirect cost – More overhead means less cash for your business. Indirect costs like raw material spoilage, inventory shrinkage, collections, and idling workers can drain your resources. Assessing and controlling these costs will increase your cash flow.

Minimize capital demands.

Your business requires capital in order to operate, but the more you can reduce the amount you need, the better your returns will be. Freeing up additional capital will release cash and boost your company’s value. That means lower interest costs or higher owner returns, depending on your capital mix.

What are some ways you can lower the amount of capital your business needs? Freed capital boosts your company’s value. Turn to your balance sheet to find the answers.

• Reduce inventory carrying costs – Storing and handling raw materials, unfinished goods, or finished products can tie up capital. Improve delivery and lower your inventory levels to increase cash flow.
• Alter payment terms for customers and suppliers – Reduce payment terms for your customers and extend your supplier payments whenever possible. Use electronic payment technologies for receivables and payables to maximize supplier credit (by making just-in-time payments) and minimize customer credit (by receiving payments closer to delivery).
• Finance equipment and real estate – Capital-intensive industries that are dependent on heavy machinery, specialized tools, and costly facilities absorb a lot of cash. To reduce costs, consider financing equipment or real estate through capital sources like leases, conventional loans, lines of credit, and SBA loans.

Use online tools.

Advancements in technology make it easier to track and manage your cash flow.

Online banking – Knowing how much is in each of your accounts and managing when, where, and how you spend that money is crucial to your company’s health. With online banking, real-time information on all your accounts is instantly accessible through a secure connection that allows you to view current and prior balances as well as pending and posted transactions. You can also pay on time or take advantage of early-payment discounts without paying earlier than necessary by implementing electronic payments.

Integrated accounting – Your bank and credit accounts can be uploaded into an integrated accounting system. This system helps ensure that reports on your accounts provide accurate and up-to-date information so you can confidently make decisions affecting your cash flow.