Why your cash flow matters in business

Any smart business owner knows that their cash flow is the lifeblood of their company. It allows companies to expand and it helps them continue operating on a day-to-day basis. If you run out of cash, you are out of business. It is as plain and simple as that. Almost 90 percent of all business failures reported that they had a problem maintaining their cash flow and accounts receivables.

Proper management of your cash flow will ensure your business will stay afloat. Take a look at your current cash balance. Make sure you know how much money you have available after you pay your bills and other obligations. If you make a purchasing decision without maintaining a positive cash flow, you can easily bankrupt your business. Never put off your cash management, make sure you are entering numbers on a daily basis and that you have a positive balance at all times. When you look at your cash flow each day, it is much easier to find out how much money is available to purchase the things you need. If you don't know how to manage your cash flow, hire someone that does.

Never budget based on the bank balance. The bank balance is completely different from your cash flow balance. The bank balance should only be used to reconcile with your cash flow balance, not to be managed from it. A simple way to stay on top of your bank balance is to predict where it will be in the future. If you can predict 6 months ahead, you will have an easier time controlling your cash flow. This can help you fix any small problems with your cash flow that could lead to larger problems.

One important rule to have is proper rules for your accounts receivables. Since your cash flow depends on the collection of funds from invoices, it is vital to your company to collect this money in a timely manner. You need to have good individuals working for you that can collect this money. One way to avoid going in the red is to start requiring a down payment from your customers.

If you invoice your customers, give them 30 days to pay. Try to avoid extending your payment terms any longer because it will start to hurt your day-to-day business and it can bankrupt your company if you don't have a positive cash flow to support it. If you have customers that abuse your payment collection system, send them off to a collection agency. These agencies will give them ample time to pay back the money and if they don't, they can take legal action against them and this will hurt their credit rating. If you do use a collection agency or a factoring company, you will not receive all of the money back for each invoice, only about 80 percent of it. This is a pretty good deal if you can't get the customer to pick up the phone anymore because they are avoiding your phone calls.

One way to protect your company from going bankrupt is to open up a line of credit with a bank. This money should only be used in case of emergency because one of your clients is not paying their bills on time. This money can help you cover the costs of your operating expenses while you wait for your client to pay you.

Always pay attention to your cash flow each day and don't let other things get in the way. While it may be important to spend more time on sales and marketing, you still need to dedicate some time to look over your cash flow. If you don't have the time, hire a good accountant that will control it for you. Have weekly meetings with the accountant to make sure everything is in order and that you have positive cash flow.