By Younas Chaudhary
Cash flow is the lifeblood of a business. What comes in and what goes out reflects the health of your business at any point in time. According to the Harvard Business School, cash flow is the net balance of cash moving into and out of a business at a specific point in time.
Cash flow can be positive or negative. Positive cash flow indicates that a company has more money moving into it than out of it. Negative cash flow indicates that a company has more money moving out of it than into it.
When you launch a start-up, managing cash flow requires a lot of agility. When I began my first business, I had to carefully control spending, watch all costs, establish and maintain good relationships with all my vendors, lenders, and customers.
You must stay on top of your account receivables and payables. This is tough when you are small, starting out, or a one-man operation. Though, by carefully monitoring all your costs and having good vendor relations, you can slowly succeed. The first few years will make you nervous but once you learn the ropes of handling and managing cash flow with diligence, you will balance your books and be cash flow positive.
According to a U.S. Bank study, 82 percent of business failures are due to poor cash flow management, or poor understanding of how cash flow contributes to business. Cash flow is critical and if your bills exceed cash on hand, you have a cash flow problem.
I, personally, have thrived turning around negative cash flow projects by investing lots of time, adding cost control measures, and carefully analyzing various aspects of the business. This work is hard as you need stringent cost control, discipline, and a laser focus on budgeting. You also need to make thoughtful decisions like buying equipment instead of leasing, being on top of payments, setting payment plans, keeping a close watch over inventory, negotiating discounts with vendors and of course, automating your processes. The most important thing to do is to keep a close watch on your cash flow on a daily, weekly, monthly, and quarterly basis.
For example, we recently purchased certain properties and found, after close analysis, that we were paying high monthly rental fees for a lot of rental equipment. Within three months, we negotiated and purchased most of the rental equipment. By owning them, we no longer have to pay their high monthly rental fees. This will save a lot of money over time. More importantly, we own all that equipment now.
To understand the cash flow to run your home and business, always start with your end goal. Where do you want to be in a couple of years and in ten years from now? How can you trim waste, be diligent and be timely in managing your finances?
Start-up owners of small businesses often ask me if it is wise for them to include their personal expenses in their business-related budget. I admit I have done this in the past but as my business grew, I stopped mixing my personal household expenses with my business accounts.
The smart way is not to mix your personal needs with your business cash flow. Keep them separate. But it is quite important to closely watch, control, and manage both your home and business cashflow requirements and adjust quickly according to your ongoing needs.
In observing how businesses that were once doing well fail in maintaining positive cash flow, I have noticed that they overextend trying to make more cashflow without keeping an eye on their costs. Yes, our human desire makes us want more as we succeed and often people start overspending or overextending their credit without having an end goal to stay with positive cashflow.
Small, simple steps can go a long way in helping tighten costs. For instance, on most of our rental real-estate properties, as soon as the carpet in high traffic areas gets ripped, we change it into hardwood or linoleum flooring so that we do not have to waste money replacing old carpet every few years. Further, hardwood floor looks nicer and is easy to keep clean.
A hawkish eye on cost reduction will help you maintain positive cash flow, generate healthy savings, and give you peace of mind in the long run. Never overbid or overpromise and underdeliver. Know that when you are in business you are a gentleman, and you need to keep your word.
Irrespective of what the business gurus say, what I have learned through 40 years of actual practice is that you have to be thrifty, competitive, efficient, and better than your competition to grow your business consistently and maintain a positive cash flow. Blessings!
The views, thoughts, and opinions expressed in this article are my own and do not represent the opinions of any entity with which I have been, am now, or will be affiliated. Further, I make no warranty regarding the accuracy or effectiveness of my recommendations, and readers are advised to consult other advisors as well as their own judgments in making business decisions.