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The ROI of Managing Your Cash Flow
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Home / The ROI of Managing Your Cash FlowThis is the 2nd of a 5-part Financial Literacy series where we will discuss trending topics within the entrepreneurial space.
In my previous blog, I wrote that “There are endless moving parts when running a small business, and an equally exhaustive list of assumptions and technicalities that have the ability to fly under the radar without due guidance”. In the midst of those analyses and fluctuations, a key question every owner must ask themselves is - how liquid is my business? Or, even more pertinent - how do I manage and maintain a positive cash flow?
In the above clip from the popular show #AskGaryVee, entrepreneur Gary Vaynerchuk cites cash flow and its possible vulnerabilities as one of the main reasons people go out of business. It’s not a bold statement by any means. Cash flow, which is managing the money that goes into and out of a business, is analogous with survival. Small businesses are particularly susceptible to overlooking the importance of managing their cash flows as well as other important statistics and metrics that can give a comprehensive overview of their business’ health and longevity. But the fact is that no matter how good your intentions are as a business, a neglected cash flow can lead to frustrations and potential failure.
That’s not to say that reviewing your cash flow has to be a matter of obsession. Micromanagement can and will lead to operational stresses, both from a microeconomic and macroeconomic viewpoint. While the former can be managed internally, the latter is understandably volatile and necessitates a certain level of planning and contingencies. The early days of Tesla is an example of this. Putting processes in place that effectively monitor and track your cash flow, and the environment that affects it, will allow you to direct your energies to other areas of the business. Having them be clear, measurable, and autonomous, where possible, will provide your business with a solid foundation for short-term growth and long-term sustainability.
So, how can your small business build such a focus? Let’s examine the following three questions:
- Who Are You?
If I asked you to describe your business, the product or service, and its value proposition in one hundred words or less, would you be able to do it? Having a clear vision and understanding of your business’ capabilities creates an initial path for you to follow. It also highlights both the resources on hand and what is required to move the business forward. Overstating or understating either of those aspects can lead to discrepancies in the cash flow statement, and cash being hemorrhaged on superfluous and unprofitable overheads. - What’s in Your Accounts Receivables?
This is arguably the most significant component of your cash flow because unpaid invoices can disrupt your business in unfavorable ways. Remember, you are financially obligated to your vendors and employees, for example. Without due diligence towards collecting what you’re owed from clients, and doing it in a timely and appraisable manner, you’ll expose yourself and your business to inopportune monetary and non-economic losses. - Are You Tracking Your Expenses and Sales?
Many small businesses will ask which of the two should be prioritized above the other. The answer is neither. Expenses and sales shouldn’t be mutually exclusive subjects. Your overall costs, such as employees and capital, must be regularly audited to determine where adjustments can be made. Sales are, quite literally, the lifeblood of your business; if they’re too low, you may need to re-evaluate your selling approach. Both can lead to cash flow hurdles, and thus needs equal attention when deliberating solutions.
Having considered these questions, how would you describe your cash flow focus? Is it strong or could it use a little work?
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