Strategic Essentials

How is Your Cash Flow? Step 1

By Valerie Cardenas

Step 1:  If You Can’t Measure It, You Can’t Manage It.

Understanding the old adage that cash flow is “King” and “Queen” and knowing your business numbers inside and out will assist you to make effective business decisions that can lead to improved cash flow.

Cause for consternation can be thinking that your cash balance in the checkbook should be the same as the Profit and Loss (P & L) net profit.  While your true cash balance is reflected on your Balance sheet, it is not reflected on your P & L because it is only one component of your cash flow.  Cash flows are affected by Accounts Receivable, Inventory, Accounts Payable, Capital Expenditures, Borrowings and Debt Service and Other Timing Differences.

Some questions you can ask yourself that may uncover undesirable items that have an impact actual cash balances:

  • Is your pricing in line with your fixed business overhead, regular expenses, and desired cash for growth and profit margin?
  • Who are your largest customers and are they paying on time? What percentage of your total revenue relies on those customers?
  • What is the cost of managing your high demand customers? Are they worth keeping?
  • Are you overpaying for services whether it is employees, independent contractors or vendors?
  • Do you know your payroll and corporate tax numbers so they can be paid on time and still meet other goals?

With a good understanding of your numbers, you will enjoy more confidence, peace of mind and more income to the bottom line!