What’s the critical component to success for a small or mid-sized business?  Making a profit is the answer most people immediately jump to — because every business needs to be profitable to survive.

But cash is king and not having a solid handle on cash flow is a leading cause of small business failure.

Profit is the simple mathematical equation of revenue less expenses. A business is profitable when revenues are high and expenses are low. But profit doesn’t equal cash on hand  — invoices may be outstanding and expenses may be owed so the actual amount on the bank statement does not reflect the day-to-day health of the business.

Profits are both meaningless and worthless without good cash flow management to make the regular investments and transactions necessary to run the business. Many profitable businesses have gone bankrupt simply because of poor cash flow practices.

Carefully monitoring and managing cash flow is essential to a business’s success.

  1. Manage expenses. Take full advantage of any payment terms offered and try to match outgoing expenses to when receivables are expected to come in. This ensures that there’s cash on hand before it needs to go back out. Most importantly, don’t make unnecessary expenditures without knowing how you’re going to pay for them.
  2. Invoice quickly. It’s difficult to make cash projections if receivables aren’t collected in a timely manner. Invoice quickly and be vigilant with ensuring that every invoice is paid on time.
  3. Keep an eye on inventory. A business that sells tangible products needs to thoroughly understand sales patterns in order to effectively manage inventories. Inventory is product that you have purchased and paid for but not yet sold, therefore tying up cash that you can’t use.  
  4. Communicate with suppliers. Avoid nasty (and perhaps costly) surprises from suppliers by communicating early and often. Suppliers may be willing to negotiate discounts or payment plans in advance of a due date but are far less likely to make concessions when an invoice is past due.
  5. Get creative with payroll. Paying employees is a must, but the schedule you choose to follow is flexible. A restaurant with daily revenues may prefer a weekly payment structure but a wholesaler with monthly invoicing may prefer a monthly payroll schedule to balance cash flow. Figure out what works best for your business.
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