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Improving Cash Flow

Jan 21, 2011

Cash flow issues seem to be a concern for many small businesses, and this time of year is usually more difficult.  First of all, let's define cash flow.  For the purposes of this dialogue I'll call it the "flow of money into and out of the business."  This includes revenue generated from sales, collecting that revenue, paying your bills for both the cost of goods sold and fixed expenses, and repeating the process.


I have often had people tell me, "my income statement or tax return says I made money but my checking account is essentially empty."  How can that be?  First of all, there are some differences between cash flow and net income.  A business may have money tied up in accounts receivable which shows up in revenue but not cash as you have yet to collect it.  Other areas could be excess or stale inventory, principal payments that don't reflect on the income statement but have to be paid with cash, or owner withdrawals that have not been accounted for, just to name a few.


Okay, but what can I do about it?  See if any of these ideas can be implemented.

- Beef up your collection process and consider changing your credit policy.

- Speed up billing.  Send invoices weekly or twice a month instead of at month-end.

- Negotiate longer terms with suppliers/vendors.

- Be careful with taking discounts if you don't have the cash.

- Watch your inventory levels carefully, and move out stale or excess items.

- Take a serious look at your expenses, and cut where you can.  But be careful about what you cut, like marketing.  It is usually a large number and tempting to reduce, but that could have the exact opposite result of what you intend.

- Anticipate cash needs (budget) and establish a line of credit to cover shortfalls.

- Fire some customers.  If they aren't profitable you need to get them to the point where they are, or weed them out.


If you need help analyzing your personal situation and developing a strategy for your business, contact Wyoming Entrepreneur for one-on-one guidance.

Category: Accounting

Bruce Morse

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