Go with the flow

When you think of what makes a business healthy, you probably focus on measures like profit, sales growth or customer loyalty. But you can have all of those things and still go out of business if you don't have the one thing that all companies need: cash.

It takes cash to pay employees, to pay the rent and to keep the doors open and the lights on. Because having cash available when you need it is so critical, knowing how to measure, monitor and manage the cash that flows in and out of your business is a vital skill. Here, we have put together the five golden rules in order to make cash flow work for you instead of against you:

1. Know how to measure it Cash-flow issues will not be obvious from even the most careful review of a company's income statement. Cash, and how your company is using it, can only be seen on the balance sheet and cash-flow statements. Sales, expenses and profits are important, of course, but an income statement represents only a moment in time.
   
   A cash-flow statement, on the other hand, shows the movement of money in and out of the business over a period of time. Other tools for understanding cash flow include some simple balance sheet calculations, such as the number of days it takes to turn inventory, and how long it takes for cash to cycle through your business.
   
   If tracking these items sounds daunting, make time to speak with a savvy advisor, your C.P.A. or a finance consultant.

2. Know the causes of cash flow problems Cash-flow problems can come from either end of the business cycle — spending or receiving. Growth opportunities necessitate investment in inventory and infrastructure, which can use too much precious cash. On the other hand, if your customers are not paying you quickly enough, your company will not create enough cash. Of course, you might also run low on cash simply because sales have slumped.
   
   Understanding these fundamental causes of cash flow can help you head off problems before they start. If you know that you are facing rapid growth, declining sales or long collection cycles, consider yourself forewarned and forearmed.

3. Build strategies that can maximize cash flow To prevent cash shortages, the best defense is a good offense, so get serious about minimizing fixed expenses. A company should be big enough to cover only its most predictable, recurring needs. Find creative ways to handle peaks in demand without hiring additional staff; outsourcing and finding interns are good strategies for “right-sizing” and minimizing cash needs.
   
   Consider non-cash ways to make purchases. Credit-card rewards programs and frequent-flier points can be effective cash substitutes, as can bartering.
   
   Finally, set clear payment terms and expectations with your customers. Consider discounts for prepayment and penalties for late payment. Knowing when you can expect payment is half the battle, but don't neglect good follow-up and collections.

4. Prepare for the worst When cash is tight, you need tools at hand to solve the problem fast. Get a jump on the problem by lining up several sources of financing in advance. Be sure to match the sources and uses appropriately. Use short-term financing options such as lines of credit, short term loans or credit cards for short-term cash needs, and long-term or secured loans only for the purchase of long-term investments.

5. Grow smart Consistent growth is the best way to smooth out bumps in cash flow. When opportunities for growth present themselves, plan carefully. Make a conscious decision about how much you have to spend to meet the opportunity and how long it will be before you will be able to pay it back.
   
   Every investment, whether in inventory, people or equipment, should have a clear return. Make sure each earns a profit, but also look at how long it will take to collect them.
   
   Likewise, if you look at each customer as an investment with a scheduled return, you'll not only improve cash flow, but profitability, too. Allocate costs to each customer by isolating and assigning each cost in the business to a job. Don't use one job to fund another; make sure each stands on its own merits. When each job is profitable, and profits are collected on time, cash-flow problems will begin to diminish.