Never ignore your cash flow

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Bikky Khosla | 26 Jun, 2012
Cash is the lifeblood of a business -- poor flow of it can spell doom to an otherwise healthy firm. And interestingly, it can hit both small and big firms. From multimillion dollar companies to mom-and-pop stores, every firm needs to watch its cash flow and keep it healthy. Money keeps flowing in and out of any business, and it's not unusual that at times it might suffer from a cash flow reduction, but if it's constantly a problem, this could create long-term problems. A small-scale enterprise might not recover from the ill-effects.

Like in many other cases, small and medium enterprises (SMEs) are more prone to poor cash flow management, mainly due to their limited financial training coupled with their lack of awareness. A small entrepreneur has to deal with a seemingly unending array of issues, and when it comes to cash flow management it usually doesn't rank as a top priority. But that's a mistake. As SMEs never get enough and some to spare like large businesses, they must be extra cautious about their cash flow.

But what if your business is doing well? Why should you bother about your cash flow? Here again many small firms miss the point. Poor cash flow not necessarily happens to a firm that is under-performing or seeing declining sales. In fact, fast-growth companies are more vulnerable to poor cash flow as they usually have to pile up inventory, keep a strong workforce, and wait for many a customer to pay. So, your sales may be bursting through the roof, and your business may look in the best of its health, but if poor cash flow is there you may be hit all of a sudden -- late but hard.

So, you need to look over your expenses and see what fat can be trimmed without the business suffering. Is there too much overhead? Is your pricing affecting your profit margin? Are you overstocking inventory? You need to monitor all these things carefully. This might sound like a no-brainer, but keeping tabs on your expenses is the key to avoiding a cash flow crisis.

However, cash flow control is not only about expenses. It's about carefully planning and tracking both income and expenses through time, and while doing that you must not overestimate your income and underestimate the impact of your expenses. Don't just think about the amount you have left in your checking account after paying your bills. What about the bills that you are supposed to pay tomorrow or next month? Will you have enough money? When will you get more money? What if your customers suddenly start buying less? What if some of your largest customers default?

In addition, you need to put every effort to accelerate receivables, improve collection methods, stretch out payments, forecast sales and expenses carefully, and achieve inventory efficiency in the supply chain. These are only some basic tips and digging a bit deeper will certainly help SMEs avoid problems in their cash flow. But the road can start with small steps. First and foremost, accept the responsibility for minding your cash flow and take care of the small things. The big things will take care of themselves.