For fairly experienced and rookie entrepreneurs alike, effective cash flow management is often mistaken for effective profit management when, in fact, they are two different concepts. Cash flow management is a tool to help an entrepreneur manage the flow of income and balance it against the expenses for his business to stay viable. Profit management, on the other hand, involves making decisions to manage and maximize profits. Chicago-based businessman Jay Goltz, writing for the New York Times, outlines some of the lessons he has learned in the field while offering some valuable tips to stay liquid.
A true cash flow problem, according to Goltz, occurs when a company makes money, but subsequently sees its cash disappear, leaving no margin for profit. Usually, this money is spent on debt-settling, investing in works-in-progress, and the purchase of inventory and new equipment. Spending on such items ordinarily does not adversely affect profit (as shown in the income statement), but these expenses can easily eat up income, if no income and expense tracker systems or controls are set up. Poor cash flow and profit management is one reason why companies go bankrupt.
There is a way, however, to control this. Effective cash flow management involves controlling and monitoring expenses and being selective with the assets a company chooses to acquire, as well as with those it decides to dispose of. The objective is to make sure that the company stays solvent with adequate reserves of cash at all times. Often, this is achieved by prudent use of company credit cards or its own credit line with the bank.
Cash flow management is like strategizing for battle with decisions made only after careful analysis and planning. Strong entrepreneurs anticipate problems before they happen. They arrange alternative sources to finance initiatives, monitor market conditions, and keep an eye out for customers who need their attention, and suppliers that fail to deliver the proper goods or services on time. They take immediate action as soon as a problem is in sight.
Cash flow problems may also be caused by external factors, which might include suppliers going out of business, tax or interest rate changes, inflation, competition, or even newly-passed legislation. Every entrepreneur will experience cash flow problems from time to time, even the most experienced ones. For for those running on margins that are too slim, even the slightest slip-up can spell the difference between staying in business and bankruptcy.
If you understand your business thoroughly, but need help in organizing the various components of cash flow and profit management, you might want to consider any one of the various cash flow management software programs available in the market today. Some outstanding software programs, such as Cash Flow Mojo®, offer different modules, such as cash flow control, budgeting, handling bills and credit debt, and income planning, to name a few. If you’re a small to medium- sized company eager to try to get your finances in order, an effective cash flow management software may just be the aid you need to start generating profits.
(Source: What I’m Still Learning About Managing Cash Flow, Jay Goltz, March 5, 2014)