Cash Flow

To a business, cash flow is like the air we breathe or the fuel we buy for our cars. It’s easy to take for granted until it is in short supply and like other precious commodities, we tend to overuse it when it is plentiful, and regret our indulgent consumption after the fact. Cash flow problems can occur in any organization from a one person business to a Fortune 500 company.

Cash flow is often misunderstood and rarely used in a practical, systematic way. To add to the confusion, the terms "earnings" and "cash flow" are frequently used interchangeably yet they are quite different. Earnings means profit or net income. Cash flow is based on the timing between the receipt and disbursement of cash.

The ’90s boom encouraged easy credit and lavish spending which became difficult to sustain. The 21st century offers many of the opportunities of the 90’s, but the reins of conducting business are being pulled in slightly. The result is a renewed appreciation for cash flow management and for business owners and creditors alike, cash flow has become a critical focus.

Cash flow has a passive personality and can be easily overlooked when business is booming. Many companies define cash flow in such broad terms as to render it a useless benchmark. But make no mistake, you can go broke while showing a profit! A small business runs on cash, not profits or sales growth. Businesses must have cash for growth and lots of cash for fast growth. You must pay salaries, purchase inventory, meet operating expenses, finance the growth and provide stability in downward markets with cash.

Tips for safeguarding capital and maximizing cash flow management

  • Avoid distorting the truth. There are two basic accounting system: cash-based and accrual-based. Each method distorts the true economic picture to a degree. Accrual-based accounting measures the flow of value, not the flow of cash. Cash-based accounting accomplishes the reverse. Understanding what your accounting method omits or distorts will help you assess the true financial state of your business.
  • Determine your cash flow cycle. The cycle to define in the carpet cleaning industry would be the service cycle. It is important to identify how much in services must be rendered in order to break even each month.
  • Create a budget. You wouldn’t leave for vacation without a predetermined destination, mode of transportation, and adequate money. Your business requires the same kind of planning and execution. Create a cash flow budget that shows the timing and amount of the expected cash inflow and outflow for a designated time period. A cash flow budget usually contains four major sections: Receipts (sales), Disbursements (payroll, inventory, insurance, advertising), Cash surplus or deficit (receipts minus disbursements) and Financing (borrowing).
  • Don't run out of fuel. Keep adequate cash on hand. Have a monthly net cash flow (cash receipts minus cash payments) of at least three times the amount of a typical month’s operating expenses. A sufficient cash balance is required for normal business operations. For large transactions, many businesses choose leasing as a financial vehicle. This approach keeps cash available and may also allow for a tax deduction.
  • Create guidelines for cash management decisions. These decisions should consider the best use of your cash by receiving cash sooner and paying cash later.
  • Create cash flow reports. The Cash Flow Statement classifies cash receipts and cash payments from operating, investing and financing activities. This statement is useful because it provides valuable information that is not available in the balance sheet or income statement.
  • Implement internal controls. In a cash driven business, it becomes paramount to institute adequate internal controls over cash receipts and disbursements.

Improper budgeting can create one of greatest risks to your business’s health...a cash flow deficit. All businesses at some time are either starting or growing. These times can be exciting and enjoyable. But, because it is impossible to accurately anticipate the length of expansion delays or staffing issues, cash flow budgeting becomes critical. Problems arise when capital budgets are too tight and money starts to dwindle.

One option to help avoid this serious problem is to keep your cash available by utilizing your borrowing power. More business owners are leasing which provides them with purchasing and staying power, especially in times when cash flow can become an issue. By leveraging you can accomplish your growth goals and in many cases avoid creating cash flow concerns.

When the time comes to replace equipment, expand your business or if you’re just starting up, find a knowledgeable leasing company that knows the industry well. The right choice can save you money and worry. They should have specialized programs to meet your specific needs. If your current lease company cannot provide funding for the equipment and services you require, perhaps a new lease company could provide broader opportunity and leverage for you.

The streamlined approval process offered by Beneficial Capital Leasing and the flexibility offered in payment structures can enhance your ability to endure cash delays, equipment changes and staffing issues. It can also help reduce the need to sell unattainable quantities of services.

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