Business Owners' Misconceptions About Cash Flow

Business owners serious about getting to the next level understand the importance of cash flow. It’s not enough to simply have more cash coming in than going out. Effective cash flow management is about building financial stability as a foundation for growth. However, when it comes to managing cash flow, many business owners struggle to grasp some fundamental principles mainly because of some commonly held misconceptions.

According to Dunn and Bradstreet, 96 percent of businesses fail due to managerial incompetence, and 82 percent fail due to poor cash flow management skills or a poor understanding of cash flow. Business owners can’t afford to let these common misconceptions hinder implementing sound cash flow management practices.

We don’t have a cash flow problem because we’re profitable. That’s not always true. Profits are not the same as cash flow. A business can report profits and still be broke. Businesses that operate on credit using an accrual accounting method could show a profit even though there is not enough cash coming in to pay the bills.

Our account receivables are strong.That’s good, but it doesn’t mean your cash flow is strong. Receivables are nothing more than a promise by your customers that they will pay you at some point in the future. Aging receivables can dry up cash flow, preventing the business from taking on new business.

Our business is still small, so we don’t need to bother with cash flow projections. That kind of thinking will ensure your business never gets big. Smaller businesses risk running into cash flow problems more than bigger businesses. All it takes is a brief period when their cash needs exceed their income to put them out of business.

We’re just a small business; we can keep track of cash flow in our heads. If your business has just one or two customers and a few expenses, you probably could manage your cash flow by the seat of your pants. However, it can quickly become unmanageable once you start adding more variables - new customers, more expenses, more employees, etc. A cash flow management process brings order to chaos, allowing you to stay focused on growing your business.

We use our annual meeting to make cash flow projections. According to Dunn and Bradstreet, businesses that limit their cash flow planning to one time a year have a 36 percent survival rate over five years. Businesses that make cash flow projections once a month have an 80 percent survival rate. Cash flow planning should be done once a month, right along with monthly payable and receivable processing.

We look at our cash flow statements at the end of each month.That’s like driving a car using your rearview mirror. A cash flow statement tells you where you’ve been, not where you’re heading. You could be heading for a cliff and not even know it. A cash flow projection tells you when you might experience some bumps in the road, giving you enough time to steer clear.

We’re a cash business, so cash flow projections won’t tell us what we don’t already know. What about the things you don’t already know, like the unexpected loss of a customer, a change in vendor payment procedures, or a sudden increase in orders? A cash flow projection allows you to manage uncertainty by controlling the movement and timing of cash in and out of the business, with the goal of building a cash reserve for the unexpected.

One of the great benefits for small business owners in this new era of secure technology and business automation is the ability to partner with expert solution providers for all their cash flow management needs. Banking solutions that offer ways to accelerate cash coming in and carefully orchestrate the cash going out of the business can bring much-needed flexibility and efficiency to businesses of any size.