Cash flow may have different meanings for entrepreneurs and small business owners, and with that, they may be quite a few misconceptions about cash flow and what it means, or what it really is and this is what gets most entrepreneurs in trouble.
With confusion about cash flow, follows business shortfalls due to poor cash management, which is ultimately caused by the several misconceptions about small business cash flow and how this should be handled.
As most of us would know, proper cash flow management is essential to the survival of any business, but especially to small business ventures because usually their survival depends on cash flow.
Here’s a list of a few of the many misconceptions about cash flow that you can analyse and avoid:
1. Small Businesses Don’t Really Need Cash Flow Management
Regardless of the size of your business, you need to generate monthly cash flow statements and projections to determine the flow of your cash. Smaller businesses with less funds need to maintain strict cash flow control as they have less means to deal with unexpected costs or other unforeseen financial obstacles.
With that in mind, it is crucial that business owners take the time to gain an in-depth understanding of proper cash flow management and take the necessary means to ensure that they implement them. This can be done through consulting with a professional that has all the knowledge and skills you will need to make sure that you follow all the steps you need to follow to keep your business’ cash-flow well managed.
2. A Cash Flow Statement Once a Month is Enough
A cash flow statement produced once a moth is not enough to show you your business’ cash projection for the long-run and it is not guarantee that things will stay the same throughout the month. A cash flow statement simply records how cash has moved in and out of the business in the past and not necessarily how much is left to sustain the business.
The cash flow projection shows the cash position at intervals in the future. It is advisable that all businesses (including SMEs) practice cash flow projection regularly to keep track of how much cash the business is running on.
3. Businesses Can Bridge Cash Flow with a Bank Loan
This is not always the case for most businesses. One of the key issues in cash flow management is ensuring that a business has the right kind of bank finance. The essential choice is between a bank overdraft and/or bank loan, as well as more recently, invoice financing (funding your business through outstanding invoices). Cash flow is a daily need for any business, especially small businesses as it is difficult for them to get credit from banks especially if you have no valuable assets within the business that the bank can hold on to.
Borrowing costs are increasingly ‘risk rated’ so whilst official interest rates are low, borrowing rates becomes more expensive as the risk to the bank increases. So, while bank loans can be considered a helpful safety net to bridge cash flow gaps, they may not always be a viable solution for the future.
4. Profits Automatically Mean Cash Flow
When a business is making positive profits, people often assume that those can be translated into cash flow – which is not necessarily the case in accounting.
Profits only show money that the business has coming on paper, but cash flow is what the business currently has. A good example to explain this is that a business that might have had profitable sales in a month, but its receivables won’t be coming in for the next 30 days. Meanwhile, the business has expenses to pay this month that exceeds its cash on hand. In this case, despite profit, the business still has a negative cash flow.
The best way to remember this is that every Rand owed in receivables is one Rand businesses don’t have in their cash flow.
5. You Can Never Have Too Much Cash
This is actually the opposite; you can have too much cash for your business. Cash itself does not earn anything if it is not being fully utilised, meaning that holding too much cash could mean potential losses of earnings. Sometimes it’s always better to invest in assets that will allow you to release cash at short notice when you need it most as a small business. Always be mindful of the liquidity position of your business when investing or trying to grow your money in multiple ways. The closer an asset is to cash, the more ‘liquid’ it is.
Assets such as buildings are the least liquid. Liquid assets are those that are most easily turned into cash, so I believe that it is advisable that you choose your investments wisely – a long-term investment is not good if your business requires funds in the short term.
Cash flow requires understanding and the ability to manage it requires skills. It’s always best to seek help in this regard from professionals. Your cash flow is what strengthens the longevity of your business. Use it wisely.
“The more a business owner knows about their cash flow, the more empowered they become” – Nick Chandi, Paypie CEO