Cash Flow is a Process

You either have cash or you don’t. It isn’t complicated. It isn’t even especially interesting. However, it is vitally important. 

Cash flow is all about the process of pricing for profit, collecting payments, and forecasting what lies ahead. When we do this well, we give our businesses the opportunity to flourish. When we fail to do this, we set our companies up for failure too. 

A lack of cash flow is what hurts most businesses. Most businesses fail — not because they’re unsuccessful — but because they run out of cash. When I first started my business, I learned how to do cash flow projection budgets (as opposed to profit and loss budgets) to better grasp the money it takes to start up a business. It’s this very same model that can help if cash flow is a struggle for you. 

We start with these basic questions: 

• How much cash do you have?
• What do you need to spend it on?
• When is new cash coming in? 
• When will you run out of cash?

If you’re struggling with cash flow, the bucket is likely already dry (or in the negatives). But you still have options. We can explore lines of credit or other financing vehicles to get you back up and running. 

But before you try to finance your way out of the hole, you need to understand these primary elements of the cash flow process so you learn to correct the root of the problem.

1. Profit 

Start by looking at your profit when you’re having a cash flow issue. Is profitability actually there? How profitable are the goods and services you sell? When we’re concerned about cash, it’s tempting to start chasing revenue — which isn’t the same as profit. 

Empty revenue doesn’t have profit behind it. Revenue brings in money, but if there’s not true profit from the transaction, it only delays the problem. Don’t settle for kicking the can down the road. Establish profit to sustain you moving forward.

Related: It’s Time To Rethink Pricing

2. Collection

Are you asking clients for the money they owe you? While it may seem obvious to collect payments, many people avoid asking their clients to settle up. During cash flow discussions, I often ask business leaders, “Have you asked clients for the money?” Too many of these leaders reply, “No, we gave them terms.” While terms are great, sometimes we need to directly ask for payment. 

Why are we afraid to ask? 

Clients push back.

But that’s okay. Be clear in your expectations (and process) for payment. If you expect to be paid, you’ll be paid. 

In this type of conversation, I often encourage clients to look at their own accounts payable. I ask, “Who are you going to pay and who will you string out?” 

Most reply, “I pay all my bills.” 

“Why?” 

“They expect to be paid and they won’t do business with me if I don’t.” 

Exactly. Your clients should view business with your company the same way. Except to be paid. Then, take the steps necessary to make this a simple process — collect deposits, take credit cards, and follow up regularly. 

3. Forecast 

Cultivate your ability to predict future cash flow. 

Cash flow problems often stem from a lack of foresight. If you can’t project what revenue will be, don’t know your payables, and only know your overhead costs, you start to depend on things to miraculously fall into place. You assume, “Money will come through. We’ll sell something.” 

Not necessarily. 

When looking at jobs in your queue and open proposals, you should be able to predict what months might create cash flow issues. Once you forecast what lies ahead, you can prepare for it. This means you can then take steps sooner to correct the cash flow problem… so you don’t have a cash flow problem anymore. 

Cash flow process isn’t complicated in theory. It’s as simple as making a profit, collecting your payments, and looking at what’s ahead. However, when you do this well, these elements can be just what you need to turn your cash flow problem into a profitable business.