Designate a cash flow manager

One of the most fundamental principles for a business’s success is also one of the most neglected—especially by new entrepreneurs who are often distracted from being focused on big-picture finances. Cash flow, or the measure of the amount of money being transferred in and out of your business, can ultimately make or break your organization—regardless of how profitable your business is on paper. While conceptually simple, launching and executing a cash flow management strategy can be tricky even for financially experienced organizations.
In this guide, we’ll do a deep dive into the nature of cash flow, and how you can manage it effectively.
Why Cash Flow Matters More Than Revenue
It’s hard to say that cash flow matters “more” than revenue, since both are defining financial metrics for your organization. However, revenue, and even your net profit can be high while cash flow suffers—and if your cash flow creeps too far into negative numbers, you may never fully recover.
This is an important realization; it’s possible to generate a lot of sales, and even have an on-paper profit, while cash flow is nonexistent. For example, let’s say you’ve made $150,000 in sales this month, but you’ve also incurred $130,000 in expenses, which you’ve paid in full. Hypothetically, this represents a $20,000 profit, but what if your customers have only collectively paid $50,000 of their $150,000 in bills? That means $100,000 of your sales have not yet become cash, which puts you $100,000 behind; if bills keep coming in, your resources may be stretched too thin, and your business may not be able to withstand the pressure.
Cash Flow Statements
Most businesses measure and report on cash flow with the help of cash flow statements. These balance sheets function much like other types of financial reports, tracking income and expenses, but they focus on actual cash gain and lost; for example, if you’ve issued an invoice, you won’t track it as cash flow income until you’ve actually received payment from your customer.
You’ll track cash flow in three main areas:
How have you spent and made money in operations? Which clients have paid their invoices? Which bills have you paid?
How have you made or lost money from investments? What have you measurably paid, and what types of dividends or sale proceeds have you made?
Has your business raised funds from investors, or have you issued dividends that have decreased your cash levels?
Analyzing cash flow statements and taking proactive action are two of your greatest chances for keeping your business’s cash flow healthy.
Your Main Priority: Tracking Cash Flow
Obviously, your business needs to take cash flow seriously, and improve it however possible without jeopardizing the rest of the business. Your first step, and highest priority, should be aggressively tracking your cash flow. Tools like Datapine’s finance dashboard are all-in-one platforms meant to help you track your company’s finances at every level, and they can help you keep an eye on your cash flow on a regular basis.
Depending on the size of your business, you’ll likely want to measure and report on cash flow on at least a weekly basis, if not a daily basis; that way, you can proactively identify key threats and/or opportunities, and capitalize on them before it’s too late.
Free Cash Flow vs. Operating Cash Flow
You should also know there’s a difference between free cash flow and operating cash flow. Operating cash flow refers to your cash flow on the basic level; how much money are you generating from product sales and paid invoices, versus how much money are you spending for employees, rent, and other typical business expenses. This is similar to calculating profitability, but only refers to realized income and expenses.
Free cash flow, by contrast, includes dividends and investments in your calculations. Free cash flow takes your operating cash flow and subtracts dividends you’ve issued to investors or owners, and represents a truer indication of your financial position.
Increasing Cash Flow
Generally speaking, a higher, more positive cash flow is better for your business. There are several strategies you can use to keep a positive cash flow:
Designate a cash flow manager.
It’s much easier to keep an eye on your cash flow and take action when necessary if you have someone directly responsible for it. Rather than waiting to look at your financial statements until the end of the month, or trying to do everything yourself, designate someone on your accounting team to be specifically responsible for overseeing and managing cash flow. This doesn’t have to be their only responsibility, but it should be one of their main ones.
Limit expenses.
This is a somewhat obvious, but important strategy: limit your outgoing expenses, especially if cash flow is starting to get tight. If you can avoid paying for something, do it. Frugal businesses naturally have better, more consistent cash flow than ones that spend indiscriminately.
Increase revenue.