A 26 year financial services veterans perspective on cash flow
By ATB Financial 8 March 2019 2 min read
Cash is king. For no one is this more true than for the entrepreneur who’s working to get their new business off the ground. Learning how to manage cash flow is a crucial milestone on the road to success.
Cash flow is the health of your company. Access to working capital will allow you to provide stability during tough times, while having cash available helps your business grow and thrive during prosperous ones. The ability to handle the ups and downs of any economic cycle also shows the bank that your company is well managed!
Of course, like many things involved in entrepreneurship, it isn’t as easy as it sounds. In fact, effectively managing cash flow can be downright overwhelming, especially if you’re just starting out. It’s always a good idea to engage financial experts, like a business accountant, to help you. As your business grows, you may even want to think about bringing in someone to orchestrate your cashflow full-time.
Whether you’re managing your finances on your own or if you’ve brought in an expert, the next step is to understand your business cycle. That means knowing how quickly the goods or services you provide can be turned into cash. For example, if you have a manufacturing business your cycle might look like: Take raw materials -> manufacture product -> sell the product -> turn the receivable into cash.
The shorter the cycle, the better it is for your business as you’ll have more cash on hand. Even shortening your business cycle by one day can have a significant impact on your company’s working capital position.
Again, having working capital is crucial to building a successful business. Most businesses don’t fail because they aren’t profitable. They fail because they run out of cash. Keep an eye on your cash and your business cycle, and your business should thrive!
Top cash flow tips:
- Entrepreneurs often underestimate how much working capital is required to grow their business. Talk to your banker and figure out how much you need.
- Finance any capital purchases like capital assets so that you don’t tie up too much of your working capital.
- Make sure you understand your finances and cash flow—even if you do bring in outside help.
- Monitoring your cash flow on a daily or weekly basis is critical. Develop strategies to make your business cycle as short as possible.
Working capital: the money you use for day-to-day operations. Current assets minus current liabilities.
Capital purchases: significant purchases that a company makes as an investment to acquire or improve long-term capital assets.
Capital assets: assets owned by the company, like buildings or equipment.
Business cycle: how fast you turn your inventory, product or service into cash.