While sales and profit margins are key metrics for any business, a balanced cash flow should be an equally important indicator of financial well-being. But according to Raymond Joabar, senior vice president and general manager for American Express Open, manufacturers often don't recognize the value of cash flow until it's too late.
"Cash is what keeps a business operating on a monthly basis," says Joabar. "Without it, raw materials soon run out, conveyor belts grind to a halt, and orders sit on the loading dock with no way of getting to the customer. Cash is also what allows your business to expand by taking on more and larger orders."
That's why it's important to understand where problems can occur, so that you can be in a position to make good decisions on a daily basis. To avoid the perils of uneven cash flow, Joabar offers five key points to help measure, monitor and manage the cash that moves in and out of your business.
- Know where you stand. Cash flow statements show the movement of money in and out of a business over a specific period of time -- not only what cash is left at the end of the month, but also the amount that entered and left the business. Understanding your cash flow can be accomplished though simple balance sheet calculations such as how long it takes to turn inventory. For those who find the task too daunting, make the investment to sit down with a pro. However you choose to do it, the knowledge gained from this process is just too valuable to ignore.
- Go to the source. Both spending and receiving can present cash flow problems. While you should take advantage of growth opportunities during good market conditions, avoid excess expenditures that deplete your cash reserves. Consider basic operational costs for both busy and slow times, and keep a steady flow of money coming into the business. Manufacturers are particularly prone to this because they must bear the expense of raw materials, labor and warehousing of finished products until an order is filled and paid. Understanding where cash flow problems originate will help you avoid them before they become an issue.
- Keep cash flowing. Get serious about minimizing your business's fixed expenses. A company should only be big enough to cover its most predictable, recurring needs. Find creative ways to handle peaks in demand without incurring unnecessary expenses. Instead of expanding or moving to a larger facility, think of better ways to use existing space. When making purchases, explore alternative payment options such as credit card rewards programs, frequent flyer points or bartering with other businesses. Try to negotiate payment terms with vendors that allow payment deferral beyond 30 days and offer discounts for paying early. For incoming cash, make sure payments arrive on time. It's critical to stay on top of collections, so don't neglect to follow up.
- Have a fallback plan. At some point your company might need extra cash, so make sure you're prepared. Some financial institutions may be more likely to extend lines of credit or loans to your company when it's in good financial health, and less likely when cash flow problems are already apparent. Once you have credit available to you, use it wisely. Short-term financing options such as lines of credit, short-term loans or credit cards are best used for short-term cash needs. Likewise, long-term or secured loans should be used for the purchase of long-term investments.
- Manage growth. Consistent growth is the best way to smooth out bumps in cash flow. When opportunities arise, plan carefully with an eye on cash flow projections. Decide how much you have to spend to reach your goal and how long it will be before you pay back the debt. Make sure each investment earns a profit, but also look at how long it will take to collect. Likewise, if you look at each customer as an investment with a scheduled return, you'll not only improve cash flow, but profitability too.