Financial planning and coordination often result in a stronger financial position. In this post, we discuss how to optimize your cash flows.
Business success is in large part determined by how well the business owner manages their assets. The most important asset for most businesses is cash. For this reason, operating cash flow is amongst one of the most important metrics to track. The most successful business owners and entrepreneurs monitor these numbers to indicate how their business is performing. They are also very helpful in discovering patterns and trends that can help the business owner expand on strengths or address shortcomings. In this blog post, we learn how to optimize your cash flows.
This blog post is the third in a series, behind ‘10 steps to better manage your cash flow in times of crisis‘ and ‘Planning for disruptions to your cash flows‘ intended to help small businesses and entrepreneurs prepare to apply for an SBA loan to grow their business.
Eight methods to optimize and analyze your cash flows include:
- Simplify your cash flow cycle
With most small business owners focused on growing their business, the cash flow cycle’s simplicity, measured in days, is a great starting point. Since everybody is familiar with calendars, looking at cash flows broken down by days is something simple that everyone can understand. - Look at Operations, Investments, and Financing
The best way to analyze your cash flow is to break your business statements into three sections: operations, investments, and financing. Calculate the operating cash flow to sales ratio to understand how much every dollar in sales results in revenue. Review each section to identify incoming and outgoing cash flows and where to budget. - Pay attention to your Liquidity Ratios.
To increase your cash flow, look first at your liquidity ratios, metrics that determine your business’ ability to cover short-term obligations and cash flows. Your accounts receivable shows how fast you are getting paid, while your accounts payable shows how quickly you are spending money. If your accounts payable turnover is greater than 30 days, and your accounts receivables turnover is greater than 60 days, there is room for improvement. Ideally, your cash inflows should come in faster than your cash outflows. In other words, your accounts receivable turnover should be longer than your accounts payable turnover. - Make Collections and Inflows a Priority
Cash inflow is the best metric to develop when looking at cash flows from operations. Companies should pay attention to accounts receivable and days sales outstanding closely, the average number of days that it takes to collect a payment from a sale. To decrease their number of days ratio, a company may consider offering an early payment discount in addition to being persistent with collections. - Categorize your income and benchmark each of them
Separate your business income into categories that match your income streams. Often, people group “income” into a single category. However, if you have income from separate business lines, divisions, or activities, separate those numbers to better determine key performance indicators (KPIs) by business lines and divisions in the future. Additionally, break expenses down into essential and nonessential expenses so that when times get difficult, you know which expenses to eliminate or cut back on first. - Look at your revenue over several seasons.
To fully understand your revenue, you need to look at year-over-year trends and understand how seasonality is impacted. It may vary by the products you sell or the customers you service, industries you serve, weather patterns, and other regional events. Knowing how seasonality impacts your revenue minimizes the probability of surprises in terms of your cash flow. - Compare your actual numbers against projections.
Comparing actual monthly and quarterly cash flows against planned cash flow gives you additional insights into new expenses and investment opportunities. Understanding the trends behind the numbers helps you make more informed decisions regarding knowing when to cut your losses or increasing your investments. - Use Financial Planning and Analysis tools.
As your company grows, the financial metrics you need to be paying attention to change. Once available only to the largest companies, businesses of all sizes can now benefit from financial planning and analysis tools that offer fast, robust analysis at a much lower price.
If you are preparing to apply for an SBA loan to grow your business, hopefully, this blog post, ‘how to optimize your cash flows’ was helpful. Contact us or call (800) 795-3919 as we have helped businesses of all sizes in all industries get SBA loans for years. We can also pretty much help you with all of your business funding needs.
