Cash flow is one of the most important aspects of running a successful business, but many businesses don't place enough emphasis on this fundamental financial element. Here are 12 basic principles every business should know:

1. Understand what cash flow actually is

First off, you should have a good grasp on what exactly cash flow is, because it's more than just revenue or profit. Cash flow is the money that comes in and out of your business over time. This is actual funds that you have on hand, and does not include money owed to you. Even a business that is profitable on paper can run into cash flow problems that can be detrimental to operations. This is why keeping up with cash flow is especially important.

2. You can't focus only on profits

While profitability is your ultimate business goal, you can't get overly caught up in focusing on profits. Cash flow is even more important in the near-term. Again, even profitable companies can run into trouble if there are cash flow problems. Cash flow is what keeps your business open, and you won't be able to achieve profitability if you have to close the doors.

3. Using worksheets and software can help a lot

"The first step to effectively managing cash flow is obviously to keep track of it in the first place,” notes Noah Parsons at Bplans. “Try using a cash flow worksheet for this. This will track all incoming and outgoing cash. If you use Google ‘cash flow worksheet’ or ‘cash flow software,’ you will find various options for downloadable files and programs that will help you get started. Compare these options, and see what others have said about them. Find the one that looks to be the best fit for you."

4. Forecasting cash flow is critical

Keeping up with cash flow includes forecasting what it will be like in the future. Pay attention to trends and consider factors that will impact cash flow both positively and negatively so you can be prepared.

"It’s a lot easier to get help from a bank or investor before you’re actually in a crisis where you’re not sure you can cover your bills," says Parsons. "If you wait until you’re really in trouble to take action, lenders may see you as too much of a risk and turn down your request. Your cash flow forecast can also help you plan the best time to make a big purchase, like a new piece of equipment or a company vehicle."

5. Monitoring current cash flow is equally important

Just as you should be forecasting future cash flow, you'll need to monitor the current situation, which will help you spot trends and problem areas that can be addressed sooner rather than later.

6. Conduct a monthly cash flow analysis

To help you monitor cash flow, it's a good idea to perform a cash flow analysis at least once a month, though the more often you can do so, the better. To do this, you would look at a particular time period and examine inbound and outbound cash flow, accounting for receipts and other expenses that have been paid, as well as all sources of income. Cash flow statements can help you determine where changes can be made to optimize for positive cash flow.

7. Get ahead of slow periods

Monitoring, forecasting and regular analysis can help you get ahead of slower periods for business, so that you're not caught off guard by a lack of incoming cash. Consider trends from the past and any plans you have for the future to help you anticipate slow periods ahead of time. This is especially important for seasonal businesses.

8. Anticipate expenses

You can't always foresee expenses before they occur, but you can project regular, recurring expenses and consider any irregular ones that are likely to come up. Think about equipment, software, hiring, or other things that may put a bigger dent in your cash flow than you're used to.

9. Staying on top of accounts receivable can make a major difference

One of the best things you can do to help your cash flow is to ensure that you stay on top of accounts receivable. This means doing everything you can to ensure that invoices are paid as quickly as possible, so the money is in your hands. Follow up on late payments regularly and find ways to encourage more timely payments.

10. How you price your goods or services is also a factor

How you price your goods or services is also a significant factor in cash flow. If you're not optimizing your pricing, you may be either losing sales or not bringing in as much money per sale as you could be. There are numerous variables to consider when pricing, so do your research and be sure you're competitive in this area.

11. It's a good idea to have a cash reserve

No matter how much analysis and forecasting you do, nothing will help you overcome a slow period better than having a cash reserve. Set up a business savings account for this very reason, and when things get tight, you'll be able to give yourself a little breathing room until things pick back up. Consider applying for a business line of credit2 to help you access operating capital during slow times or when unexpected expenses come up.

12. Not managing cash flow well is dangerous to your business

Not staying on top of cash flow means putting your business in jeopardy. Cash flow issues are often cited as one of the top reasons businesses fail. Don't let your business become the latest in such a trend. If you would like to discuss your cash flow issues, please contact a business professional at Nevada State Bank.


2. Subject to credit approval. Terms and conditions apply. See a banker for details.


The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank. Nevada State Bank is a division of Zions Bancorporation, N.A. Member FDIC