Proper cash flow management for small businesses

When you consider that 82% of all small businesses fail because of cash flow issues, it shouldn’t be hard to view cash flow issues through an entirely different, and entirely urgent, lens. It takes the confluence of many factors to build a successful business. From assembling the right team at the right time to achieving the right product or service for the market you operate in to staying on top of the competition and getting the necessary funding – these are just some of the key elements to success. There’s a lot more.

But today, we want to focus on the importance of cash flow. You saw the statistic above. 82% is quite a high number. Are you among the cohort of Utah-based small business owners who don’t even know how to define cash flow and what it entails? That’s what we’re here to help you with, so let’s dig right in.

What is Cash Flow?

Cash flow is essentially the measurement of the amount of cash that enters and exits your business. Cash flow is normally measured on a quarterly basis. Positive cash flow denotes more money coming into your business than leaving it. This should allow you to – at the minimum – pay your bills, employees, and other associated overhead. Negative cash flow signifies that you’re unable to meet even those most basic of financial obligations to your company. You may also have heard of “working capital,” which merely denotes the concept of having enough money to meet your financial obligations.

It is important not to confuse cash flow with revenue. Revenue by definition merely measures how much money is coming into your business. Revenue is only half of the cash flow coin. The other side of that coin goes by many names, including loss, shortfall, deficit, and so on. There is an important rhyme to remember: “Revenue is vanity, profit is sanity, and cash is reality.” The nuts and bolts of that saying is this: the death or life or rejuvenation of your business begins and ends with cold, hard, cash.

The key to managing your cash flow is a matter not of how much or from where, but rather when. When are you going to get more cash into your company’s hands and when will it need to be paid out? What will be the time gap between those two events and will there be a shortfall? Figuring out how to get more cash into your hands is important, but how to manage the timeline of incoming and outgoing cash will mean the life or death of your business.

How Can You Improve Your Cash Flow?

Now, let’s talk about how you can improve the overall health of your business by improving the overall health of your cash flow. There are tried-and-true methods to managing your cash flow, so why not just copy what works without reinventing the wheel? Let’s look at each step one by one.

1. Cut Costs

What are your recurring monthly, quarterly, and/or annual expenses? Are there areas where you can cut back on some of those costs? Could be lowering your utility bills to decreasing rent or payroll where possible. A lot of people – and businesses – wind up whittling away their cash on subscriptions, insurance or services they have completely forgotten about. You need to carefully go through your accounts and take note of what you spend your money on. What do you really need? Otherwise, let the rest of it go.

2. Sell Unused Assets

Depending on the type of company you run (a construction company, for instance) might have equipment on hand that you no longer need. If you have inventory that’s no longer needed or obsolete, it’s time to get rid of it to help pad your accounts with some extra cash. It may not even be big equipment. It could be old computers, office furniture and more. Do a thorough review of what you do or do not need and sell what you don’t. There isn’t a shortage of places where businesses can offload unused items. Check this list out.

3. Utilize a Business Line of Credit

You may not have first considered a business line of credit as a way to pad your cash flow, but it does represent a good insurance policy against cash flow problems. Here at First Utah Bank, we proudly offer various types of lines of credit for small businesses in Utah and would be happy to discuss your options with you today. You may be able to get a line of credit for a percentage of your accounts receivable or inventory if you use them as collateral. Using a line of credit may sound risky, but if you use that money wisely, your cash flow problems might become a thing of the past.

There is so much more to cash flow than even what we have written here, which is why we’re going to save the rest for Part II of our series. But in the meantime, if you need assistance or advice on your business banking needs, whether it’s cash flow or otherwise, visit our website today! https://www.firstutahbank.com/