A Publication of WTVP

Understanding cash flow and how to access additional capital can keep your business fiscally healthy and profitable.

The expression “cash is king” has been used by many successful businessmen over the years. Regardless of who originally coined the phrase, the meaning behind it remains consistent. Strong cash flow is important to the overall fiscal health of your business.

Understanding Cash Flow
Cash flow is the process by which money flows in and out of your business, and it plays a key role in your long-term profitability. By effectively managing the cash flow of your business, you are in a better position to cover expenses or make investments that will grow your business, thereby increasing your overall profit margin.

Cash flow consists of several elements: starting cash, the amount of cash on hand at the beginning of a period; cash in, the cash received during the period including sales, borrowed funds or equity; cash out, the cash paid for fixed and variable expenses, including administrative and operating costs as well as vendor payments; and ending cash, the result of starting cash plus cash in less the cash out at the end of a period.

Cash flow is impacted by various components of your business, including how your inventory is managed, how you process sales, your processes for receiving and making payments, capital expenditures and the debt your business may carry. A good understanding of what cash flow is and how it is impacted can help you better manage your cash flow in a way that is most beneficial to your business.

Making Cash Work in Your Favor
There are several steps you can take to make sure you are optimizing the cash flowing in and out of your business. The first is simply knowing sources of income and expenses. Keeping itemized records of the cash flow process will help you quickly determine whether you need to increase cash in, decrease cash out, or a combination of both. There are several ways to achieve this.

The most logical way to increase the cash coming into your business is to increase sales. Start by looking at your existing client base and determining what additional goods or services you can sell to them. Cross-selling to your current clients is a cost-effective way to bring more sales to your business. You might also consider expanding your client base by extending your geographic reach or tapping into a new demographic in your current area. Either way, the objective is to sell to more customers than you are currently reaching. Finally, consider pricing discounts as an incentive for customers to buy more. This increase in sales will positively impact the cash coming into your business.

Another way to increase cash is to convert your receivables into cash as quickly as possible. Deposit cash, checks, card settlements, etc. into your account daily (or as frequently as possible) so that you have quick access to that cash. Consider investing in technologies like Remote Deposit Capture (RDC) to expedite the process. Solutions like RDC make it possible to deposit cash without ever leaving your office or storefront, giving you access to cash and saving you time in the process. Automated account billing systems and precise payment terms with specific conditions (ideally less than 60 days) also increase the flow of cash into your business.

Cash in can also be increased by reducing cash out. By managing and reducing expenses, you are paying less and will, therefore, see more cash coming into (or staying within) your business. Set up a plan for controlled disbursements when it comes to paying your bills. Instead of paying them all at once (on the first of the month, for example), pay each bill based on its individual terms. By not paying out significant amounts of cash at one time, you are maintaining fluidity in your business’ cash flow and allowing more flexibility when it comes to potential resource purchases, investments, etc.

Another way to reduce cash out is to take advantage of vendor discounts that may be offered for supply or product purchases. Ask about discounts for cash or quick payments. Again, this method of paying out less cash at once keeps more cash in your business and readily available for your use.

Accessing Additional Capital
Regardless of how diligently you manage your cash flow, there may be times when you need access to additional cash for improvements, expansions or other business opportunities.

Loans are one option for gaining additional access to capital that you might need for inventory, equipment or real estate. Your financial partner can help you determine the best loan for your specific needs. Additionally, investors or owner equity can provide long-term solutions to business capital needs.

Sometimes businesses find themselves in a situation where they have earned excess profits for a period. There are several ways this additional cash can be put to good use for the business. It can be used toward debt reduction, as savings or investments, put directly back into the business as capital improvements (buildings, equipment, etc.), or split among employees as profit-sharing or salary enhancements.

Understanding cash flow, making cash work in your favor, and knowing how to access or use additional capital are all ways that business owners can keep cash in the position of “king” and use it to help their business remain fiscally healthy and profitable. iBi

J. Boger Hessing is VP – Commercial Relationship Manager with PSB – Princeville State Bank, member FDIC and equal housing lender. For more information, call (309) 693-9494, email [email protected] or visit