The 10 Rules of Cash Flow

Cash flow is the lifeblood of all businesses and is probably one of the most challenging functions when running nearly any business, especially a small business.  Have enough of it and you sleep like a baby.  When it becomes erratic and in short supply, worry increases and management spends more time chasing dollars and less time improving performance.  Here are some guidelines that will help you sleep better.

1. Cash Is King.  Having enough not only helps you sleep well at night; but it also creates opportunities.  When you have the cash resources, your mind opens up and more opportunities appear, like discounts on inventory, great buys on equipment, upgrading employees, the list is endless.

2. Know Your Cash Balance.  Monitoring your daily cash balances gives you another perspective on how your business is doing; from a bunch of different angles.  How well cash is coming in versus going out, how well payables are being under or over paid, if collections are slowing etc.  Looking at this number over a period of months will give you a good idea where “a cash balance” comfort level is.  Let’s say that comfort level is $20,000, your daily balance are running around this amount.  If that number suddenly decreases to $5k for a few days, your mind automatically send up flares.

3. Do Today’s Work Today.  It is difficult to know where your cash balances are if key work is not completed daily. This would include invoicing, bank deposits, recording payments, purchases etc.  The financial activities of the business have to be transacted daily if the daily check book balance is going to reflect the accuracy of the on-going operations.

4. Invoice early.  Cash cannot be collected until it is invoiced and although you may not be able to invoice early, you can improve your invoicing system.  The slower the invoicing is completed after the work is completed, the worse the cash flow.  So invoice, daily or weekly, this will speed up your cash flow.  

5. Financial management is a key function.  Most business owners don’t consider the financial activities of the business as important as say, sales or production.   But without good financial management functions being completed on a consistent basis, good cash management will not happen.   Make sure someone qualified is doing that work daily.

6. Don’t Manage From the Bank Balance. The bank balance in your checking account and the checking account balance in the check book are two different things, they are as different as an apple and an orange.  Cash in the bank won’t include deposits made late yesterday nor does it record checks that are outstanding and in the mail to vendors, customers, employees or taxing authorities.  Only use the check book balance from your accounting records.  Using your bank account balance to manage your company is a prescription for failure, you cannot manage from it.

7. Create a cash flow forecast.  Accounting tracks historic events, the check book balance is the cash balance today; but the cash flow forecast is a tool that can predict cash balances in the future.  Updated weekly (for those that are managing tight cash resources) to monthly (more typical), a cash flow forecast will give you boat loads of information that can transform how you run your business.  Also, knowing that your future cash flow is sound will also enable you to sleep better at night.   Another way to look at this, a cash flow forecast is pro-active, is it projecting the future.

8. Cash Flow Problems Don’t Just Happen.   Just like any other problem, there are signals far in advance before a cash shortage suddenly appears.  It is just most business owners don’t have processes in place that will give them an early warning system.  If your business is highly seasonal, growing rapidly or has erratic profit, a cash flow forecast will give you future information that you can use today.  Nearly every business that implements a cash flow forecast and updates it at least monthly, eliminates most cash flow problems.

9. Cash Flow Profit Power.  Cash flow rolling through the company can be consistently improved if the company is consistently profitable.  There is a direct relationship between a company that has strong cash flow and one that is profitable.  Typically businesses that have cash flow challenges also have profitability challenges – no one is focused on profit.  Focusing on profit is a key element in improving cash flow in your business.  Improve profit by setting monthly profit goals and measure to them.

10.  Cash Flow Improvement Measurements.   Here are three easy ways to measure how your cash flow is in your business:

Working capital  Take the balance sheet and write down current assets minus current liabilities.  The number should be positive.  That number should also be increasing, that is a good indication if cash flow is improving.  Example: if current assets are $100,000 and current liabilities are $75,000, working capital would be $25,000.

Current ratio  This measures the amount of money the company has to pay every dollar in current liabilities.  For example if current assets were $100,000 and current liabilities were $75,000, current ration would be $100k/$75k or 1.33 or the company has $1.33 for every dollar in current liabilities.  A ratio of 1.2 is about the lowest you should shoot for.

Quick ratio  This measure the amount of money the company has in cash and accounts receivables to pay current assets.  For example, if current assets were $100,000 and cash and accounts receivable equal $75,000 and current liabilities were $75,000, then there would be a relationship of 1:1.

Businesses that have cash flow problems also have frustrated C-level people.  Decisions are made around cash flow and not around profitability.  Maybe some of these will help you improve the cash flow in your business.  If you don’t have a cash flow forecast and want to create one for your business – contact us for assistance in creating one that will work for you.


Have a great week,


Dan Lacy

The Prophet of Profit