19 June, 2020
Running a successful business means being on top of your cash flow cycle. But Why, you may ask? Because your cash flow shows you everything you need to know about your cash position.
You see, if there’s one thing you need to understand to see whether your business is making you money or costing you money, this is it folks, it is all about the cash flow cycle!
The cash flow cycle is the part wherein you’ll see if your dreams are coming true or not as far as your business goes. In fact, you should fully understand your cash flow cycle as though it’s the back of your hand.
On our previous Know Your Numbers blog, we’ve talked about the 5 Reasons on Why You Need to Know Your Numbers (I would suggest checking that out if you haven’t already) and this part of the series expounds more on the advantages of doing so.
Let’s talk about the cash flow cycle now, shall we?
The Typical Cash Flow Cycle
Most businesses have the following cash flow cycle:
Goods or Services Sold à Cash Coming In à Payments to Employees/Utilities/Business Expenses/Vendors/Cash à Services Provided, Goods Produced, Work in Progress à Back to Goods or Services Sold
Now, you got to understand that the above is just a simple representation on how money goes around in a business.
As for the cycle’s length, it is not uncommon to have about 90 days from the moment you put out some capital (for production of goods/services) to the time you get some return (profit when a customer or client pays for your services or goods). This basic representation can give you a lot of insights which you can use to your advantage.
Rocking the Cash Flow Cycle
Okay, so what can you get from understanding the cash flow cycle’s representation?
One of the biggest reasons why some new and small businesses fail is because the management wasn’t very realistic about cash flow expectations. If you’re expecting returns within 2 weeks but your cycle is 90 days, you’ll be in a lot of trouble before you get to see a cent of profit; so how do we go about fixing that dilemma?
Well, you can continue production without releasing more money to fund your business until you see some profit. How? Simply move back the date on which you’re expected to pay some of the business expense.
For instance, if you have a clothes manufacturing business with a cash flow cycle of 90 days and you’re looking at putting in a capital of let’s say $100,000 – just that, no more no less; how can you keep the production running until the first batch is sold when you’ve already used up all your capital at day 75?
Note that there’s still 2 weeks left until you make a profit from what you’ve made. Surely you cannot simply close shop and end production right? Take note that after your launch and if your customers happened to like your designs, they would crave more, you wouldn’t want to miss that!
Okay, just a recap of your situation: You got 0 or close to 0 cash left, you got $100,000 plus mark-up worth of goods, 15 days left until the big department store which commissioned you pays up, and they say they want more of your goods. You have to produce more but have no more capital left until your payday. Oh and here’s one reason why you’re running low on cash, you’re used to paying in cash as soon as the materials for making your products are delivered to your shop.
Here’s what you can do: Continue ordering materials and negotiate for the payment of that batch to be at least 3 weeks from present date (so you get a few days extra from your payday). Your workers would still be paid in time, plus all your utilities. You simply changed ONE detail – moving the date of a business expense so that you can pay it off with pure profit. Isn’t that an easy fix?
The example here is just a simple illustration of how having an understanding of your cash flow cycle can benefit your business. By tweaking some small details, you’d be better off in handling your cash and putting it back into the cycle to make you even MORE money.
Good understanding of the Cash Flow Cycle = More Money
More money means great profits – profits which you can use to either expand your business or maybe just save up so you can get a dream home, dream vacation, etc.
This is actually one of the things we do at CMK accountants and what I teach my clients. We help our clients understand their cash flow cycle so they can be better managers and be more successful in running their business.
Speaking of helping clients (and you!) understand the cash flow cycle and run their business, take a look at this:
Strategies for Improving Your Cash Flow Position
Do you see how a simple miscalculation can spell the difference between financial doom and great financial gains? Great thing there are easy fixes for that!
Here are some things you can do to improve your cash position:
Love the strategies above? I can help you more! Simply tune in for more installments of the Know Your Numbers blog series and you’ll surely be on your way to mastering your business’ cash flow cycle and more.
You can also connect with me on social media via Linkedin and Facebook, or connect to the CMK team on Facebook and Twitter to be one of the first to know when we have new blog entries. I hope that this blog helped you towards understanding or knowing your numbers a lot better. Cheers!