Summary
As you can see, many factors
influence the cash flow of a business. Understanding the concept of
cash flow and how to measure it will help you become more competitive,
improve performance, and ultimately make your business successful.
A business owner who is forecasting accurately his or her cash flow
can be very effective at managing expenses because he or she can keep
the accounts payable cycle as long possible and the accounts receivable
cycle as short as possible. He or she can keep the cost of producing
the product down by planning ahead of time when to buy inventory.
Fine-tuning the operation cycle keeps a business as efficient as possible.
Identifying cash shortages
will allow you to line-up the necessary financing in advance and give
you time to negotiate the most favorable loan rates. Nothing will
impress a banker more-when you approach him or her for financing-than
a careful cash flow analysis that can show precisely why you need
$104 (or whatever amount) in the next year to keep your business healthy.
And identifying periods of excess cash will allow you to place the
cash in less liquid investments that will pay higher interest rates
than checking accounts.
Cash flow management allows
you to plan for unexpected increases in cost production. Unless you
can absorb some of the cost increases, you will have to add the costs
on to your product. And that can be a very dangerous proposition.
Ideally, the marketplace will determine the cost of your product so
you can be competitive. If you have to raise your prices because your
production costs are going up, you can lose a valuable competitive
advantage and price yourself out of business. It's happened to more
than a few businesses. In a lot of these cases, keeping an eye on
the "scoreboard" might have allowed for timely adjustments to production
and cash flow management.
Don't leave this stuff
to the bean counters! Understand what is happening with the money-the
life blood of a business-as it flows in and out of your business.
