Measuring cash flow is basic arithmetic. What is my cash balance at the beginning of a month less my cash at the end of the month? If the amount increases, my business had positive cash flow. If negative, negative cash flow. Dunn and Bradstreet research shows that businesses have a 44 percent higher chance of survival over five years if it carefully plans and manages its cash flows. Cash flows increasing or decreasing can be a result of any number of reasons. Following are two reasons, both related to accounts receivable:
1) The timeline to collect accounts receivable is greater than the timeline of payables. If a business has only one month of cash but it takes two months to collect receivables, cash will trail receivables by one month. Depending on the spread between A/R timeline and A/P timeline, profit margins and the amount of cash spent that only hits the balance sheet determines how long a business can operate.
2) Similarly, if it takes months longer to collect on receivables than the timeline to produce a product, the business will be operating at a negative cash flow until such time as there is enough margin retained in cash to eliminate the cash deficit. Some companies will resort to obtaining inventory loans to cover the spread, but this does lengthen the time that it will take for the business to have a positive operating cash flow position.
For a business to start and remain in a positive operating cash flow position, managing its receivables is essential. Increasing cash inflow by making sure invoices are remitted timely, have a process and a person responsible for collecting receivables. Decrease outflows by keeping overhead costs under control, eliminate all non-essential expenses as much as possible and have a savings plan in place for future investment into the company for growth and health.
