How Does Your Small Business Manage Cash Flow Today?

In running a private company, cash flow is often considered the lifeblood of your business.  However, small business leaders can easily fall into a trap by managing cash flow based on "gut feel" or through loosely defined practices.  Today, we explore this topic a bit further.

Let’s start with a quote by the great Michael Dell to help illustrate cash flow relative to profitability.  He famously once said, “we were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”

What a great visualization here! Keep an eye on your gas level (or battery charge)!

But how do you define cash flow in financial terms?  Simply put, cash flow is the net movement of money into and out of a business over a specific period, indicating its financial health and liquidity.  Typically, cash flow is categorized into three main types include: 

• Operating Cash Flow: Cash generated or used for day-to-day business activities (e.g., paying wages, cash from customer sales)

• Investing Cash Flow: Cash movements related to longer-term investments (e.g., purchasing / selling property or equipment)

• Financing Cash Flow: Cash activities related to funding the company (e.g., taking out debt, loan repayments, owner distributions)

The good news is that inexpensive software exists today to help you monitor current cash flow and to forecast out future flows.  An important caveat here is that you should first use bookkeeping software to properly catalog financial transactions that touch upon cash flow.  If you don’t feel you have sufficient internal resources to do your bookkeeping effectively, outsource this responsibility to a reputable 3rd party.          

In addition to effective bookkeeping, it is critical that you and your other potential key leaders have a firm grasp of financial management and accounting to effectively manage financial resources, make informed decisions, and drive your organization’s financial health.

For instance, what levers might you pull today to free up additional cash in your business?  How might you use this cash more effectively elsewhere in the company, in line with your goals?

Food for thought.

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Thank you for joining us as we chronicle our journey.

Sincerely,

Greg Romero

Founder & Principal

Romero Solutions Group