Cash Flow Management for Business Continuity

Cash flow management refers to the money moving in and out of a business. If that flow is positive, the business is doing relatively well and making more than it spends. Negative cash flow, on the other hand, means the business is in a period of financial hardship and is spending more money than it is bringing in. This article will offer some expert advice for business owners who want to learn how to manage their cash flow more effectively for improved operational continuity.

Why Cash Flow Is Important

For small businesses, cash flow is especially important. Unlike accounts receivable, which includes money that hasn’t yet been paid to the business, cash flow is a metric that shows whether companies will have the working capital to pay employees, make purchases or upgrades, repay loans, or meet other key needs. It doesn’t matter how much a business is about to bring in at the end of a large contract its owners need a cash infusion now just to get by.

Calculating Cash Flow

The first step towards improved cash flow management is to find out how to accurately calculate this essential metric. There are three commonly accepted formulas for doing so, each of which serves a slightly different purpose.

Free Cash Flow

Free cash flow refers to resources that are currently available for distribution among stakeholders or for reinvestment into the business. It can be calculated using this equation: net income + depreciation / amortization – change in working capital – capital expenditure = free cash flow.

Operating Cash Flow

Operating cash flow offers a window into how much money is available within the business on a day-to-day basis. It can be calculated using this even simpler formula: depreciation + operating income – taxes + change in working capital = operating cash flow.

Cash Flow Forecast

Cash flow forecasts offer a look into the anticipated future of a company’s financial situation. They’re usually calculated by month, quarter, or year using this formula: beginning cash + projected inflows – projected outflows = cash flow forecast.

How Cash Flow Affects Business Continuity

Business continuity essentially refers to a company’s resilience. Maintaining continuity following natural disasters, disease outbreaks, cyberattacks, and other external threats can make the difference between making a full comeback after the situation stabilizes and going under. 

Cash flow management is crucial to business continuity. Business owners who have been conscientious about cash flow planning should have enough extra money on hand to deal with disasters or weather at least brief storms. Unfortunately, though, not every business gets to that point before disasters hit.

Tips for Maintaining Positive Cash Flow in Small Businesses

The most important thing to remember is that cash flow must be monitored constantly. Once business owners know how much money their companies are taking in, they can follow some simple steps to increase cash flow. Those steps include:

•  Sending invoices right away

Adjusting inventory as needed

Leasing equipment instead of buying it

Reevaluating business operations

Restructuring loan payments

Borrowing money before it’s urgently needed

Get Back in the Black

Winding up with a cash flow deficit is a situation no small business owner wants to face, but it’s not the end of the world. There are effective strategies for getting out of the red. The best option is usually to secure a loan to help resolve immediate problems, then implement the tips listed above to improve the business’s cash flow forecast and ensure the loan can be repaid on time.