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Why Cash Flow Management is One Numeracy Skill
Every Business Leader Must Know
Do you need to be great with numbers to be an effective leader? Not exactly. Running a business is more about hard work, vision and adaptability than anything else. Sure, savvy resource management is a huge component, but most of that can be delegated.
Not all of it, though — not to the extent that you can stay out of the loop. Cash flow management isn’t something any business leader can afford to misunderstand. If you want to lead your business to great success, you need to make a firm commitment to overseeing cash flow management, no matter how ill-suited you are to the task.
Why is this issue of such vital importance? Allow me to explain what cash flow involves, how it can so easily go badly wrong, and how you can effectively handle it without detracting too heavily from your regular managerial duties:
The Basics of Cash Flow
Put simply (courtesy of this excellent Wave cash flow guide) cash flow is the movement of money in and out of your business, encompassing everything you make and everything you spend. Having strong cash flow is about ensuring that you consistently cover your costs while leaving enough in reserve to safeguard your operation.
Some business owners track cash flow quite broadly, perhaps using a spreadsheet or even just taking general notes. Others take it a lot more seriously, tracking even the most minute expenses at all business levels and using dedicated accounting software. If you aspire to great things with your business, you should aim to join the latter group.
Why cash flow is more pressing than profit
Reaching the point of profitability is a huge goal for every non-charitable startup. It’s a milestone that proves lasting viability and hints at the tangible rewards yet to come. That said, it’s a mistake to focus on profitability as the key metric for the growing business, because it doesn’t guarantee success — history is littered with examples of profitable businesses that failed.
How does a profitable business fail? By making a major misstep in cash flow and suffering a catastrophic breakdown in operations. Imagine that you have a strong deal with a supplier that allows you to sell products very profitably, and you want to scale up to make even more money — to that end, you place a huge order. Unfortunately, there’s an issue with your payment processor, and you’re unable to pay for that order.
Angered by your lack of professionalism, your supplier decides to make a deal with another business, cutting you off entirely. Without supply, you can’t sell, and you can’t make any money — as your finances dry up, you’re forced to vacate your office space. In a short time span, your business has collapsed entirely, despite its fundamental profitability.
Cash flow is the key to sustainability. You can endure a lack of profitability for quite some time provided you’re able to cover your costs, but a cash flow problem will sink you rapidly.
How to Oversee Cash Flow Management
Now that we’ve established why cash flow matters so much, you might be wondering how you can do something about it. You can’t put all your time towards it (you have other things to do, and sales to drive), but you can’t leave it entirely to someone else (that’s far too risky). Here’s how I recommend you establish a sensible balance:
- Set up regular reports. You should be using some kind of accounting software to keep your finances in check, so ensure that you’re getting regular reports on your cash flow situation. If you have someone in charge of finances, they can produce them, or you can task another employee with learning the ropes. With at-a-glance confirmation of where you stand, you’ll have an easier time determining what (if anything) needs to change.
- Build a culture of frugality. Wasteful spending is a huge problem for growing businesses, particularly when employees have spending power without knowing the necessary context of the company’s broader financial situation. Train your staff to keep business costs down — find freeware alternatives to expensive software tools, stop ordering unnecessary office products, negotiate stronger deals, etc.
- Use smart scheduling. Every company handles payments slightly differently, so you might need to make a regular payment within 7 days, 14 days, or 30 days of the target date. The longer you can push back a payment (without incurring a penalty), the easier it will make your life, so make good use of the payment periods provided for you.
- Get strict with clients. Late payments can be disastrous, so you can’t afford to consistently let your clients get away with avoiding their financial obligations. It’s all about setting precedent and creating a routine. Make it clear from the beginning that you expect payment by a certain time, and if you don’t get it, take action to chase it. Your clients should all feel slightly pressured to pay up on schedule (invoicing is a big part of this: Bplans has a good intro to check out).
- Find more ways to make money. If you’ve reduced and rescheduled your outgoings as much as possible, the logical next step is to simply make more money. This might sound obvious, but plenty of money-making opportunities get overlooked for weak reasons — for instance, a company might be reluctant to raise its prices because it’s scared of losing clients, but if your prices are too low, that’s a risk you have to take.
Money is the blood of your business
Every facet of business can be reduced to money. The bills you pay, the payroll you cover, the prices you charge, the value of the time you commit to your work. The simple balance of what you pay versus what you make will always determine your fate: follow the above tips to stay on top of your cash flow, and save emergency resources whenever you can, because you can’t prepare for every eventuality.
Mostly everything else can be delegated in its entirety, but not this — never this. Never let your daily duties drive you to overlook your cash flow, because one mistake can have a domino effect that sends everything tumbling down.
Further Reading from Skills You Need
Based on our popular management and analysis content the Skills You Need Guide to Business Strategy and Analysis is a straightforward and practical guide to business analysis.
This eBook is designed to give you the skills to help you understand your business, your market and your competitors.
It will help you understand why business analysis is important for strategy—and then enable you to use analytical tools effectively to position your business.
About the Author
Kayleigh Alexandra is a content writer for Micro Startups — a site dedicated to giving through growth hacking. Visit the blog for your latest dose of startup, entrepreneur, and charity insights from top experts around the globe.
Follow us on Twitter @getmicrostarted.