Cash Flow Is The One True King
Too many business owners don’t understand that cash flow is king. They never look their own finances. They think that they just need to focus on sales. They forget that they have to pay their suppliers in due time.
Cash Flow is Not The Same With Money in The Bank
This is one major misunderstanding with cash flow. Business owners think that when they have money in the bank, their business is doing all right. If that is the only metric they see, they will have a big surprise at the end of financial year.
Cash Really Flows
When I hit the workforce age and was able to find a job, I always ran out of money before the next paycheck. I thought that I wasn’t paid high enough. But that was not the case. I never thought about cash flow. Heck. I did not know what cash flow was and never heard of it. I think I missed this in my basic finance class.
I was spending my paycheck on items that weren’t necessities. I bought a sound system with my first paycheck. I bought a game console with the next. And so many things in the following months. I did not have any savings.
Then one day it hit me. I have to stop spending money that I can’t afford. This is the basic of cash flow. If you have a constant paycheck, do not spend more than what you are making.
Robert T Kiyosaki will scream at me because of that statement. He will advise you to add your income, not limit your spending. I agree with him to a certain point.
But what if you can not expand yourself? You already working with two jobs and still don’t make it to the end of the month. What to do?
Understand your Financial Statement.
This will be your first answer. See where your money flows. Business or personal, a financial statement is your guide to your financial situation.
This personal financial statement is from richdad.com. You can download the file here.
Try to fill your number in the financial statement. You can analyze your current financial position. Is it in the danger zone? Or is it in the positive growing position?
Economic Slow Down Slows The Cash Flow
For businesses, the condition of the economic will influence your cash flow immensely. Suppliers will ask for early payments and your buyers will ask for longer payment terms. If you are not ready, this change of payment period will devastate your business.
This is a scenario that even a seasoned business owner might overlook.
You buy a product from a manufacturer. You already have discussed the best price. The quality is good. You know that this product will sell. You asked for a 3 months payment term to your vendor. Let just say that this deal cost you $10,000. So in 3 months time, you would pay $10,000 to the manufacturer.
Now, you promoted this product and attracted some buyers. They were willing to buy in bulks. You managed to sell the product for $15,000 in total. But they asked for the same 3 months period.
You would think that this is a good deal, right? In 3 months time, you would be making $5,000. Here’s the catch. People forget that time keeps rolling. From the time you ordered the product until you made your first sales, it might take weeks. Even months. Let’s just say for this case, it takes 1 month.
March 1st, you ordered the product. Start promoting the product.
April 1st, you made your first sales order. Not the whole batch, but some of it. Sales $5,000 with 3 months payment term. (With the thought that this sale might be an April Fool’s joke).
May 1st, you had completed all the sales. $10,000 with 3 months payment term.
June 1st, you had to pay the manufacturer $10,000. But you had not received any money from your buyers. How were you going to pay? You would only receive $5,000 on July 1st and the rest on August 1st.
This mistake happened all the time. Business owners just think they will have $5,000 profit without taking care their business’ cash flow properly. You might end up losing your good standing with your suppliers because of this. Or worst, they would sue you because of payment negligence. That would cost you money!!
Manage Your Account Payables and Receivables
Like the above case, profitable does not mean you have a positive cash flow. You should ask for the longest term possible for your payables and the shortest term possible for your receivables.
Mind the time gap! You should always collect your receivables before you pay off your payables! If possible, ask for an advanced payment (30%-50%).
Manage Your Inventory
You should have a good inventory management, too. You do not want to have inventory that doesn’t move for months. You want to sell them immediately. Turn them into cash. A fast turnover is what you need.
Manage Your Growth and Expansion
This is another trap for business owners. When you are making money and have money in the bank, you will think that this is the right time to expand. I am not against it, though. It is your business. It is just I have seen too many businesses collapsed after they just expanded the business.
Business owners sometimes just think that now they can afford a bigger space rent. They forget that bigger space will make your utility bills higher. Additional staff will cost you money, too.
Always make sure, when you expand, you have the cash flow to sustain it.
Manage Your Costs
Ask your bank for lower fees. Pay attention to your insurance rate. Use LED lamps. There are so many things that you can do to lower your costs. I am not saying you have to go cheap all the way. Just manage it.
Control! Control! Control!
All the above advice is about control. You should have control over everything. Not to rule with iron fists, but to have a healthy overview of your business.
These are some controls that you can apply within your business:
- The cheque signer and the cheque writer should not be the same person.
- Refunds to customers should be approved by someone other than the employee actually making the refund. When that isn’t possible, refund receipts should be reviewed daily.
- Reconcile your book daily.
I will suggest you to read some more books regarding Cash Flow:
- Increase Your Financial IQ: Get Smarter with Your Money
- CASHFLOW Quadrant: Rich Dad’s Guide to Financial Freedom
- Propel Your Small Business to Success: Accelerated Actions to Maximize Profit
Play the Cashflow Game
This game really helped me to understand better about cash flow and how to use it in real life. It will help you understand your personal financial statement. The more you play, the more your financial IQ increases.
You will be given a role to play. You start as a person that still runs in a rat race. Live from paycheck to paycheck. Like real life, when you roll the dice, you will find opportunities or doodads. Find your way out of the rat race.
Communication is Key. Seek advice from your accountant. Also, speak to your bank and suppliers, because they may be able to help you.
Master your financial statement. Read some basic financial books.