November 9, 2020
Keeping your business healthy is just like keeping your body healthy. To keep your body healthy, there needs to be a proper amount of blood circulation. In the same way, businesses need the flow of cash to run smoothly and efficiently. If your veins have something blocking the flow, you won’t have enough blood to pump through the rest of your body. Keeping a careful watch of how cash flows through your business can not only keep it alive, but also help you make a better profit.
What makes profit different from cash flow? If you only look at a screenshot of your business’s profit, you won’t be able to see what things are causing your business to struggle. There are multiple numbers that need to be considered when looking at your cash flow. Taxes, inventory, accounts payable and receivable, and capital expenditures all need to be looked at when you’re analyzing cash flow. In accounting, profit is only looking at how much revenue surpassed your expenses. It doesn’t tell you where your cash is going and why you don’t have enough to pay your suppliers this month.
Funds can get tied up in multiple ways. Maybe you’re buying too much inventory or you’re investing in new equipment without selling off the old stuff. Leaving capital in unusable forms ties things up quickly. You could also be struggling to stay afloat because your customers aren’t paying their invoices quickly enough. If you don’t get paid for what you’ve already delivered, you most likely won’t have enough cash to fund the next project.
Finding the right solution for your business is simple. For most businesses that struggle with cash flow, what they need to do is figure out what item is clogging the stream. If you aren’t able to pay off suppliers fast enough, start revising your client management to get payment for your services sooner. As soon as your deliverables are in the hands of the consumer, they should pay off their bill. If inventory is piling up, do some analysis to see what items are flying off the shelves and what isn’t. If you produce inventory on a monthly basis, slow down the production of those that don’t sell and start putting those funds into other places that could use improvement.
If you’re ever unsure where to start or you don’t feel comfortable managing your business’s finances, you can never go wrong hiring outside help. You won’t be able to keep your business running if you don’t have enough money to fuel it. At Citizens First Bank we offer cash management services to help you keep your small business alive and well. Contact your local branch for more information.