I love talking about about Cash Flow.
But I’ve had a long career in finance. Unfortunately, when small business owners are struggling, Optimizing Cash Flow can be hard to figure out. Where to start?
So, if you are trying to learn more about Cash Flow as a small business owner, here are 3 ways to get started:
One: Understand that profit is not cash flow.
Profit equals your Revenue minus your Expenses.
To understand how this relates to Cash Flow, consider that your revenue is not always cash. Maybe you provide a service, do the work, invoice your client, and then wait for them to pay that invoice.
Performing a service is Revenue, but it is not Cash flowing into your bank account!
The next 2 lessons in Cash Flow will build on this concept.
Two: Understand the importance of cash reserves.
When you are learning about cash flow, it is important to know what your typical recurring expenses are each month.
And then you need to build an emergency fund.
Work on building up this cash reserve until you have 3-6 months worth of expenses held in an easy to access account.
The balance in this account equals security plus peace of mind plus better sleep at night!
Three: Understand the impact of uncollected receivables.
And if you really want to start with tactical actions toward positive cash flow, look at your uncollected receivables.
- Make sure you send out invoices quickly
- Make sure you offer simple payment options
- Make sure you follow up fast on past-due accounts
- Consider offering discounts for fast payment or rewards for early payment
- Consider requesting up-front payments or deposits prior to beginning projects
Remember that Revenue does not equal Cash. Often, Revenue equals Uncollected Receivables and an incredibly inconvenient gap in positive cash flow!
Understanding these 3 lessons will exponentially accelerate your learning process and lead you towards financial confidence and Cash Flow Optimization.