Posted by Sam Polimeni
One of the greatest daily struggles of a small business owner is having to walk the fine line between paying the bills and investing in future growth. Many times, business owners look at their sales charts and see profit going up, but they don’t see their cash flow situation getting any better. They are making more money, but still not having any more to spend!
So how does that happen? Well, what we have is a problem not necessarily with overspending, but with cash flow management.
In order to grow, a business needs to be able to spend more cash, but often times the additional profit doesn’t make it back to the bank account fast enough. This can happen as a result of poor inventory management, poor billing practices, or simply as a result of increased overhead associated with growth.
While the solution might seem to take a larger line of credit from a bank, this can actually cause more problems than it solves. Instead of finding a way to borrow more money, we recommend taking a closer look at cash flow management and implementing what we like to call the three-way cash flow forecast.
The three-way cash flow forecast identifies the relationship between profit, cash, and sales in a way that lets you see exactly how much additional money you need in your bank account in order to meet growth requirements. From this point forward, you can start tweaking your cash flow management procedures in order to create this surplus.
If you’re holding inventory, consider trying to improve your payment terms with vendors. On the other end, consider implementing stricter terms for customers that tie up cash flow for long periods of time. If you can keep your cash longer, and get paid faster, this might be enough to make up the difference.
Even if those simple tweaks don’t solve all of your cash flow problems, there are dozens of other opportunities you can claim. Every single day, we work with companies just like yours to create a three-way cash flow forecast, and isolate areas for improvement. Wouldn’t you like to know how you can double your profit without doubling your debt? Contact us today, and we can show you how to do just that.
