A Realistic Approach to Growth – Focus on Cash Flow Management
Wit
h each new milestone, businesses experience both opportunities and obstacles. Recognizing these challenges and meeting them with a strategy for sustainable growth can be the key to optimizing opportunities and hurdling obstacles.
I recently posted an article on LinkedIn, 6 Growth Challenges Your Business Will Face (And How to Overcome Them), in which author Firas Kittaneh identified six growth challenges businesses commonly face and how to overcome them.
- Cash flow management
- Responding to competition
- Nurturing a great company culture
- Learning when to delegate and when to get involved
- Keeping up with market changes
- Deciding when to abandon a strategy
At the top of my own list of challenges every business will face is cash flow management – a challenge that will be present throughout the life cycle of your business. Cash flow is simply defined as the movement of money in and out of your business. Cash flow problems are one of the top reasons small businesses fail. You can either control your cash or you’ll be controlled by it.
Running a financially successful business is all about the numbers. Keeping a finger on the pulse of your cash flow is critical because it provides a clear numbers picture of one of the most important financial health indicators for your company.
Unlocking the secret of your cash flow comes from first understanding how long it takes your business to spend cash on your resources to produce sales and then convert it back to cash. This fundamental information is easily calculated from your financial statements, and gives you a starting point upon which to improve your cash flow. It’s known as your Cash Operating Cycle, or Cash Conversion Cycle. With this financial intelligence, you can benchmark your current time (expressed in days), then monitor the changes as you begin to implement strategies to improve. See my short video, Unlocking the Secret of Your Cash Flow, to learn more. The three major components for calculating your Cash Operating Cycle are:
- Inventory
- Accounts Receivable
- Accounts Payable
For example, if you improve your Cash Operating Cycle by 10 days and your average daily sales are $10,000 your cash flow increased by $100,000 (10 days x $10,000 sales per day). In other words, you now have $100,000 more cash to operate your business, and you didn’t have to borrow it. The faster the Cash Operating Cycle, the less working capital is required to run your business.
Simply put, when you are generating cash from operations you should be re-investing in your business. This creates healthy cash flow that sustains and grows companies. All of this valuable information is available from your Statement of Cash Flows, which is perhaps the single most important financial statement. Every business owner should learn how to read and understand this statement with the goal of translating it to a cash flow forecast. This analysis enables comparison of what you wanted to happen and what actually did occur. It is only then that gaps can be identified and adjustments made to plan for and manage growth – thus empowering a business owner to control cash and not be controlled by it!
Welcome challenges – they can be a source of inspiration for new direction or a catalyst for initiating needed change. They provide opportunities for re-evaluating whether your company is on track with its vision and re-assessing relationships with customers. By maintaining control of your cash flow you can be ready to meet challenges with confidence and with the ability to respond to them optimally for the continued success and growth of your business.
