Earnings are good and profits are great – but if you don’t have sufficient cash flow, your business may find itself in trouble.  If a major customer is slow in paying, or if a huge invoice for supplies comes due before you have the cash to pay it, your otherwise healthy business may experience a cash flow emergency.

What is cash flow? Cash flow is the money that moves in and out of your business. It is used to support business operations, expand and add value to the company. In other words, cash flow equals long-term business success.

Cash in: Monies received from sales of goods and services. Money received as loans or outside investments is also considered cash in. Just keep in mind that if you extend credit to customers, while you may have made a sale, there’s no cash in the drawer until payments are received and checks clear.

In other words, an account receivable – a payment owed to you by a customer – is a sale, but it’s not considered actual cash flow until the payment is received, and deposited and the customer’s check clears.

Cash out: Cash out is money paid for salaries, supplies, inventory, leases and other operating expenses.

Aside from salaries, the largest portion of cash out usually goes to purchase inventory. In manufacturing, for example, the purchase of raw materials, supplies and components is a big chunk of cash outflow. Payments made on loans, or to purchase assets, is also cash out.

How do you track cash in and cash out?  Here’s a simple way to determine your cash flow for a month:

Starting Cash: The amount of cash on hand at the beginning of the month.

Cash In: All cash received from sales, receivables, interest, sales of assets, sales of stock and other sources.

Cash Out: All cash paid in salaries, expenses, supplies, to purchase inventory, and other operational expenses, from heating to postage.

Ending Cash: Add starting cash to cash in, subtract cash out, and the remainder is ending cash, and a complete picture of your cash flow for 30 days.

Be prepared.  Cash flow can be positive or negative. The objective of business is to have more cash (ending cash) at the end of each month, each quarter and each year of operation than you had over the same time frame last month, last quarter or last year.  Both small and large businesses can experience positive and negative cash flow over time.  If you prepare for fluctuations, your business should be able to handle those occasions when inflows are less than outflows.

Some examples: Say your starting cash for April is $10,000. You receive $9,000 in cash sales and $9,000 in receivables from a customer to whom you extended credit earlier. In this case, total cash in is $18,000 for the month of April.

However, you pay $6,000 in salaries, $2,000 in expenses and $4,000 to purchase additional inventory, so total cash out the door is $12,000.

In this example, ending cash works out to be $16,000, and $6,000 of that is positive cash flow. Congratulations. Your business is growing!

Now, let’s look at an example of negative cash flow – a nice way of saying you had a slow month or slow quarter.

As in the previous example, your starting cash for April is $10,000. You receive $9,000 from cash sales, but no payments from accounts receivable.  In this case, total cash in is $9,000, while cash out is still $12,000.  You show a negative cash flow of $3,000, with an ending cash balance of $7,000.

Ups and downs are part of the business cycle, a good reason to set aside a cushion for those lean months, and to keep slow pays part of your customer base – knowing you’ll receive payment at some point.

How to Keep Cash Flowing: Any business survives, long term, on positive cash flow. Fortunately, managing cash flow isn’t magic. It’s not even hard to do if you follow a step-by-step process, and keep a close eye on the cash moving into and out of your business. Why? Cash flow impacts all business operations, from sales to accounting to equipment and supplies

Conduct credit checks: With every new client or customer, determine if the business or individual is credit-worthy by conducting a credit check – a payment history. It costs a few dollars, but may save thousands of dollars by avoiding deadbeats with a poor payment history.

Accept “fast” payment methods: Credit cards, ACH and wire transfers, and remote deposit of checks can equip your company to move receipts into your bank account faster.  Click here for information about Remote Deposits from Nevada State Bank®, a service that allows you to scan paper checks at your place of business, accelerating the check clearing process.  This reduces the time it takes to get money into your bank account.  Accelerated check clearing can also reduce the risk of fraud by allowing returned items to be identified sooner, so they can be collected.

Manage accounts receivable: Get paid on time – or early – so cash flows more quickly. Use customer relationship management (CRM) software to track payments, deliveries and identify downstream cash flow problems before they become problems.

Collect on overdue accounts: Create and follow a collection process so your company is paid on time – according to a contractual agreement. Get it in writing so you and your customers aren’t faced with unexpected surprises.

Run lean: Minimize work in progress, maximize shipping and delivery times, and keep as much cash as possible in your account rather than using that cash to pay for business operations. A safety net will help you sleep soundly at night.

Keep inventory low: Funds tied up in inventory can’t be used for other purposes. The key is to maintain sufficient inventory – but not too much. Order inventory just before it’s needed and just before it’s shipped.

Pay on your terms: Pay bills on time, unless there’s an incentive to pay early, like a 10% discount on inventory that’s paid for on delivery. Also accept inventory on consignment or find other ways to extend payment terms to keep more cash in your business.

Overcome a cash crunch: If you do find yourself short of cash, lines of credit and short-term loans can free up the cash you need to keep moving forward and keep growing your business!

Track Cash Flow to Stay Afloat.  Optimizing cash flow is simple, but it shouldn’t be simplistic. Track money in and money out at least weekly, and use CRM to track slow pays and clients who need a phone call to collect past due accounts.  Drop the deadbeats and keep your best clients and customers happy with fast turn-around of goods and services, extended credit and even discounts for early payment.

There’s no way to avoid the ups and downs that are part of the business cycle, but there are lots of things small business owners can do to smooth out cash flow from month to month.  Step one? Understand cash flow – where the money comes from and where it goes – using CRM and best accounting and business practices. These are the keys to keeping cash on hand and the company afloat – even if it has been a slow quarter.

To find out more about cash flow solutions for your company, contact a business advisor at any Nevada State Bank Business Center.


The information contained herein may not represent the views and opinions of Nevada State Bank or its affiliates.  It is presented for general informational purposes only and does not constitute tax, legal or business advice.