That old chestnut ‘cash is king’ is oft-repeated (and repeated and repeated) for good reason.
After all, it’s the single best measure of your business’s health so managing its cyclical ebb and flow is crucial to your long term (and perhaps short term) success. Make no mistake, when businesses fail most do so because of poor cash flow.
Not convinced? Here are 4 more great reasons to make getting to grips with your company’s cash flow status your number one priority.
1. There’s no substitute for truly understanding what’s going on in your business
It’s certainly not good enough to consider your business’s financials as your accountant’s concern and not yours.
It doesn’t matter how busy you are, your company’s financial bottom line needs to be a priority. If you’re feeling bogged down in excessive busywork — such as invoicing, chasing payments or collections — investigate payment chasing software and services to ease your burden. Similarly, if your financials have gotten out of control, book in some time with your accountant or advisor to do a review of what’s happening in your business and some financial basics.
2. It’s just not well understood
An article from The Harvard Business Review entitled “Are Your People Financially Literate?” revealed that around 70% of U.S. managers (from C-level executives to supervisors) couldn’t pick the correct definition of ‘free cash flow’. While it’s safe to assume SMB owners and owner/operators would fare better, it’s a useful illustration of how easily the fundamentals of business can be overlooked.
The irony here is that it’s not complicated. Not clear on the definition yourself? Click here then here.
3. It’s where the action is
Having a firm grasp on your cash flow isn’t about looking back — It’s about being able to plan for the future, manage your cashflow reserves and intelligently achieve your business’s goals. Got big plans for your business? Understand your cash flow. Want more time to enjoy your life outside the business? Cash flow again. Want to be in business this time next year? Yup, cash flow.
4. It’s often a downward spiral
Once cash flow gets away on you, it’s hard to get it back under control. The best way to avoid the problem entirely? Get paid promptly. Manage your customer’s expectations early on, invoice immediately, follow up overdue invoices like clockwork and don’t be afraid to escalate if an overdue isnt getting attention.
Simply put, it’s important. Luckily, appreciating cash flow doesn’t require an MBA. Generally all you’ll need is a grasp of the basics and the ability to work a spreadsheet. Of course booking in some time with your accountant to get an even better handle on the ins and outs of your cash flow cycle is encouraged as is rock solid payment practices.