Why Positive Cash Flow is Necessary for Business Success

Reason for Positive Cash Flow
Maintaining positive cash flow is the only way for a business to make money for both the owners and employees. Businesses large or small that rely on debt funding for the long term are giving away profits when a disproportionate amount of revenue has to service the debt load. Business owners who understand cash flow can make wise projections that control the destiny of the organization. This creates a framework for strategic decision-making that will position the company for future growth or a future sale.

Keep the Books
A bookkeeping system is necessary to track all expenses and income sources. List "cash in" (income) and "cash out" (expenses) for each month, and project cash flow based on monthly sales projections. "Once you have entered the actual figures for the previous month, you can forecast the individual figures for the months ahead more accurately," writes business author Peter Hingston on page 140 in the book "Starting Your Business."

Hire a bookkeeper on either a daily, weekly, or twice monthly basis to enter the data and help review finances. Use a Certified Public Accountant to get an overview of tax laws and larger financial issues that can impact future business.

Track the Cost of One Customer
Add up the expenses related to making a sale: time spent talking to the customer; how many miles driven; how much advertising money was spent. Calculate the cost of obtaining one new customer to ensure enough money is coming in to make the operation profitable. Nonprofit organizations need to track the cost of acquiring one donor to make decisions on expanding the donor base while managing expenses.

Collect Invoices Consistently
Tell customers to pay bills in 30 days or less so cash enters the business in a timely manner. Provide incentives such as gift cards or business lunches for those who pay their bills on time for three months in a row.

Generate More Revenue
One way to generate more revenue is charge higher prices to new and existing customers, or offer new services to existing customers that are easy to provide. Startup service companies will need to fight the temptation to charge low prices in order to land a new customer. Offer a "new customer" price as incentive for a first sale, but charge high enough prices so there is money for salaries and to invest back in the business. This generates cash coming in which is needed is needed "to acquire supplies, equipment and other assets that a business requires to accomplish its business purpose," according to Nancy Blondin, CPA who wrote the online article "Cash flow in and out" on Tncpa.org.

Ask for New Customers
An established chiropractor in Pasadena hung a banner outside his practice that read "Now open for new patients." Reward existing customers for referrals that become new customers. Give tickets to a baseball game or other gift. Ask for referrals to reduce the costs of obtaining new customers.

Conserve Cash
Use financial strategies like factoring to avoid paying for supplies before orders come in. The co-founder of Softline Home Fashions, Jason Carr, said "We started our company with very little money. We used factors. People take a certain percentage of the invoice and they collect on receivables paid to them." Softline purchases quality polyester fabrics from Asia and distributes them for curtains and decorative pillows through mass retail outlets and independent stores in the U.S. and Canada.

Boost Sales; Reduce Inventory
Review inventory to determine if too much cash is tied up in products that sell only sporadically. Don't stockpile inventory instead of making sales.

I helped a startup company selling products to restaurants that had a major sale early on. The sale made the two business partners think they hit on a profitable business idea. They rented a small warehouse, loaded up with inventory, and started calling on restaurants. Then they asked me to generate leads. One partner stayed in the warehouse while the other partner made calls sporadically and blamed me for poor quality leads. They bought a van and painted a logo on it. We had meetings but their inventory remained greater than their sales and their sales activity. Eventually, the business failed.

So locate the challenges to developing a positive cash flow and take steps to overcome those challenges. This will result in having a business operating long term with more revenue than debt.