‘You can’t pay your bills with profit’. In the current times, when credit is tight and liquidity is dwindling, all eyes are on cash flow – the oxygen needed to keep daily operations pumping.
In this article, I will cover some common misconceptions about cash flow management:
Misconception #1: Looking after cash flow is my accountant’s responsibility, not mine
I am reminded of famous quote by Jack Welch, Former General Electric CEO
“If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cash flow.”
The truth is that poor cash flow management skills is one of the leading cause of business failures & therefore entire Leadership team must review & manage the cash flow on regular basis.
Misconception #2: If my income statement is healthy, my cash flow must be too
If only this were true! Closing the deal, making that sale, and delivering on your promise in order to win repeat business are all vital components to build a company, but just because you have invoiced for the services rendered doesn’t mean you can count your chickens before they’ve hatched.
We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.
Misconception #3: Our accounts receivable is strong, so we don’t have to worry about cash flow.
It only takes two or three late payments before small businesses can find themselves with a cash flow problem, and you begin to fall behind on your own financial obligations. So the key is keeping a beady eye on the amount of cash actually flowing into your bank account, rather than what you expect to receive. If it’s not in the bank, don’t count it!
Misconception #4: We generate cash flow projections every year when we do our budget. That’s enough.
This is a very common, but slightly startling misconception. Just like you wouldn’t wait an entire year to check your bank account, you should not wait a year to generate cash flow projections. Yearly cash flow projections are too broad to keep you in the know when it comes to your cash flow. A lot can happen and change in a year, and you need to be able to adapt to unexpected situations quickly and efficiently with the confidence that you have the funds to do so.
By preparing monthly cash flow projections, you will be better equipped to handle unforeseen obstacles and have a better understanding of where your business stands at any given moment.