If income is the purpose of business, cash-flow is the lifeblood. As a business owner, you know how important cash-flow is to your business. Without cash, you can’t pay your bills, your employees or purchase the goods that you will sell. And if you can’t pay your bills, it doesn’t matter how much money you are making on paper, your business is in big trouble. Without cash-flow, your business runs the risk of becoming insolvent.

Accordingly, as a business owner it is imperative that you understand the inflows and outflows of cash and how they can affect your organization. Let’s take a closer look at just how business cash-flow works. Cash is generated into a business through sale of your products or services, loans or owner investments, or asset sales. Cash flows out of a business through business expenditures, loan principal payments, asset purchases and owner withdrawals. These cash inflows and outflows can be categorized into three main categories: investment cash-flow, financing cash-flow and operations cash-flow.

First and foremost, you need to generate enough cash into your business to satisfy your immediate obligations. During different times during the life of your business, you may generate the cash that you need in different proportions from the three categories above. At startup, you might generate cash-flow from financing, whether debt or equity. Over time though, you must generate the majority of your cash-flow from operating activities – that is the sale of your products or services. Operational cash-flow is critical for the long term success of your business. Unless you are a technology startup eyeing a VC investment or acquisition, investing and financing aren’t viable ways to manage and grow your business long-term.

With operating cash-flow being the most important part of cash-flow to most businesses, it is critically important to be able to recognize oncoming cash-flow problems and to be able to take the steps necessary to avoid cash-flow induced catastrophes. Below are five signs that your cash-flow is being stressed to the max and five ways that you can improve your operational cash-flow.

Five Signs of Cash-flow Stress

1. Sustained decrease in working capital – unusually low balances in working capital accounts or unusually high balances on working capital loans put you at significant risk!
2. Expanding accounts receivables as a percent of revenue –While credit terms may be a requirement of doing business, remember that you are not in the credit business. You are in the business of getting paid!
3. Increasing accounts receivable aging – every day of A/R is a day without cash!
4. Increase in average payables aging – paying obligations late is not only a sign of cash-flow problems, it compounds them!
5. Missing payments – if you get to this point, you had better act now!

Five Ways to Improve Your Cash-flow

1. Create cash-flow forecasts – understanding when money will come and go out will allow you to make a good plan to be prepared.
2. Compare actual cash-flow to forecasts regularly – regularly reviewing your cash-flow situation will allow you to identify and correct problems before they become disasters.
3. Bill customer quickly – the sooner you bill, the sooner you will get paid. Never let billing get de-prioritized.
4. Optimize your credit terms – evaluate how your payables and receivable terms compare. Look for ways to speed up your receivables such as performing customer credit checks, offering discounts for early or pre-payment or charging late fees.
5. Have a backup plan – regardless of how well you are managing your cash-flow, there will be times of cash stress. Cash stress can even be related to good business developments like rapid growth or capital investments. While you shouldn’t chase bad money with good money, you should have a plan for supplemental cash-flow when needed. This will keep a problem from becoming a catastrophe.

Managing your cash-flow should be an ongoing part of your business. If you don’t understand the basics of cash-flow for your business, you will probably find yourself in a cash-flow crunch sooner rather than later. If you need assistance in creating a cash-flow statement, a cash-flow forecast or a plan to improve your cash-flow situation, contact Presti & Naegele at 212-736-0055 or info@pntax.com today.