The Business Edge Blog

August 17, 2010

What Businesses Ought to Know About Guarding Their Cash Stash

 

Yours may be one of the businesses that has run into cash flow issues during these tight economic times. Do not take this lightly since 82% of business failures are due to cash management problems according to a study by a US bank. Let’s look at important concepts of cash management.

First, your available cash doesn’t necessarily directly follow your sales. Income from sales does not always immediately hit your bank account. There is often a time lag to doing business; the more that you depend on sales to other businesses, the longer the time delay your business will experience between incurring the expense and being paid. When you invoice another business, you can not count on that cash until it arrives. Even if you work only with individuals, you have a percentage of clients who will be late in paying for your services.  If you bill insurance providers for payment, there is always a delay.

Secondly, if your business includes the sale of physical products, this will have a major impact on your cash flow. You will incur the expenses for development and production of that product, or acquisition of the product before you have any cash from sales. Inventory is an expensive element of doing business, but if planned carefully, can be very profitable.

Finally, it costs money to grow your business. Many entrepreneurs make the mistake of not investing any money in their business growth, but others try to grow too rapidly and lose track of the expenses that growth requires. Being able to strike a balance between growth and cash required is one of the traits of a successful entrepreneur.

Use the idea of working capital to monitor your business. Your working capital is the money in the bank that allows you to pay your bills, keep up with ongoing expenses, purchase inventory and generally stay in business in the time lag that you are waiting to be paid by your customers. Know what this amount needs to be and adapt your business practices in order to maintain it.

If you are ready to grow your business, let’s talk!  That’s one of many great times to hire a business coach!

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3 Comments »

  1. Thanks for the great information on the cash flow of doing business. I now realize different aspects of a business will have different time lines for receiving payment or return on investment.

    Comment by chipwellness — August 24, 2010 @ 7:10 am | Reply

    • Thanks for the comment. Yes, there are businesses that deal with major differences in receiving payment and return on investment. I’m working with a doctor who has vendors that request payment at the time of providing services within her office, yet she must bill insurance before she sees any money. You can imagine how long some insurance companies take to make payment. She has to use her own cash to cover the difference in time between paying the vendor and receiving payment from the insurance company. If she did not plan for this well she would run out of money to make payroll, etc. before the insurance payments arrive. It makes life stressful when so much of her business’ income is in Accounts Receivable pending payment.

      Comment by bizcoachholly — August 24, 2010 @ 7:19 am | Reply

  2. Great post! Thanks for sharing.

    Comment by Chief — August 24, 2010 @ 8:28 pm | Reply


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