Managing Your Cash Flow — the Lifeblood of Every Business

Managing cash flow is both a science and an art. Making sure you have enough cash in the bank while making decisions on what bills to pay, and what to do with your company’s cash, is a critical element of business operation, whether you are cash rich or cash poor.

As I was growing up, I learned from my parents' and grandparents’ businesses that cash is king. Stretching your payables and pulling in your receivables is the most important thing a business can do. There is an art to doing all that and my parents and grandparents had the gift.

When you pay your personal bills, you have to have to ask yourself several questions to make sound payment decisions—for example, do I have enough money to pay this credit card and when do I want to pay it? It’s a defined skill that entails determining what you are going to pay, in what order and when. The skills are similar when you are running a business.

The critical issues of cash flow boil down to two concepts: visibility and control. Visibility means that you know what money is coming in and what’s going out and just where you stand financially. Visibility is also giving you the access to the information you need to support your payment decisions. Control is having the power over what you are going to do with your cash at any given time. This control requires having the right tools in place so you can have the visibility and the knowledge to make informed decisions.

In many cases, when you run a business, what you pay is based on the relationships you have. The whole basis for starting my most recent company was that the complexity of the decisions surrounding cash flow and accounts payable is more than just looking at the due date and an amount, it’s looking at the whole relationship. You always pay rent and utilities first - you have to keep the lights on, but after that there is a lot of discretion that you use every day when managing your cash. It means considering what the contract says, when was the last time you paid a vendor, whether they cashed the check, what was the work they did and was it something you feel great about.

Some business owners and accountants just sit down and pay all payables based on due date, but they’re not maximizing their cash flow because they’re not taking advantage of the terms they have. If you can create a schedule and pick the dates when you make payments, you can make your money work better for you.

Many successful businesses manage cash flow using an artistic approach, knowing intuitively whom they can pay when. The intuition involves a good amount of data analysis that is not put into a systemic process. As a result it can be risky. For those that have the intuition, it makes their life easier and for those that are just learning, they have the experience and intuition at their finger tips. The cash in your bank account is your working capital, so if you can stretch out your vendors an extra two weeks, you’ve just gotten yourself enough capital to hire two more people, ten more people, a hundred more people.

Managing cash flow has different implications for different sized companies; a larger-sized company would have a treasury department that uses different processes to maximize cash. On the other hand, a small business owner has a different approach and might be trying to tie the inflows and the outflows better to keep afloat.

Cash flow management plays out differently based on the economy—during a recession you have less cash on hand to meet your accounts payable obligations. It’s important to be prepared for when receivables start turning more slowly, that you have enough cash to cover what you are going to do. Make sure you have an equity line on hand to help you if you need it to do the things you want or need to do. Online tools are available to help you manage your cash flow through the good times to weather the bad times, combining both the art and science in business.