OCC Ask the Expert—The Keys to Cash Flow

Question: I’m running a profitable business as represented by my accounting statements, but somehow, I keep experiencing cash flow shortages. What’s happening, and can I fix it?​

A: Congratulations on running a profitable business. Several factors can contribute to negative cash flow and are generally not found on your income statement, but rather on your balance sheet: 

Accounts receivable: Your customers may be taking longer to pay their invoices, impacting cash inflow. Remedies are following up on late payments, implementing stricter payment terms, or offering discounts for early payments. 
Accounts payable: Negotiate favorable payment terms with your suppliers. Longer terms provide more time to generate cash from sales. 
Inventory: Large balances can tie up cash. Review inventory practices and examine reorder lead times to ensure stock levels are optimized without overcommitting funds and impacting customer demand. 
Capital expenditures: Large purchases can strain cash flow. Evaluate the necessity and plan timing to align with cash availability. 
Debt repayments: Consider renegotiating loan terms or restructuring your debt to ease cash flow. 

Other considerations that can impact cash flow are seasonal business fluctuations and unforeseen expenses. Incorporating a management reserve strategy can help address and mitigate these risks.  Many of our clients routinely save 20% for this purpose. 

Cash flow is the lifeblood of any business and having a financial plan with a periodic understanding of the data are your keys to ensuring you have sufficient cash for your business.   

Central Oregon Community College has a Small Business Development Center that offers free, confidential professional business advising and a variety of low-cost courses to help entrepreneurs through the business lifecycle: cocc.edu/sbdc.