Cash Flow- what is it really and how to master it...

 C ash Flow is on everyone's mind in these tough economic times.  It is really the ulitimate difference between the collection of your receivables and how you choose (what time table) to disburse this money on the other end.  This is one of the most important jobs an owner or  manager does, because lack of cash can put you out of business in a flash.

In most companies the cost of goods needs to be paid for well before the receivable is attained.  One of the mistakes I see small companies make is that they use their cash on hand to pay bills off without thinking ahead about what they will need next week, next month, etc. As soon as cash comes in they disburse it in a hap hazzard way and revert to also spending on non-essentials, like lunches out each day. When the cash is gone, they wonder why the are stuggling again.

In general,  you must learn to leave in enough cash when business is good, or if you got a bigger job than expected, to cover  months in the future that may be lean.  Many companies have credit to pay off, and bills waiting, but if you don't learn a system to stretch the possibilities and make it go farther it becomes an overwelming task.

So, I thought I might do a little series here that might help a few of you take a step back and look how you approach this area.  If you recognize yourself here, and can make a few improvements, then that is great.

First

Do you really know how much you need to run your operation, and how much cash you need on hand each month?  How will you know if you have the proper cushion? 

My favorite  way to measure this is the Quick Ratio. This is current assets (less inventory) divided by current liabilities. This measures a companies liquidity (easily convertible assets to cash) to meet its obligations (basically their ability to meet short term obligations). Sometimes this is called the "Acid-Test Ratio". The higher your number, the stronger your company is, the lower means your struggling.

Here's an example:  If your assets are $250,000 minus $50,000 of inventory =$200,000/ $75,000 of liabilities your number is 2.7.  That means for every $1 of liabilities you have $2.7 dollars to pay it. 

This is no time not to be honest with yourself.  Put all your bills into the figures, and only include assets you are prepared to use to pay off liabilities that can be accesed easily.

If this number is at or under $1, you are probably struggling.  

More to follow.... 

Next:  How creating processes and procedures in invoicing can help Cash Flow

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