When talking to entrepreneurs, the topic of cash flow management comes up frequently. Perhaps they have heard a radio spot commercial from a bank suggesting they are good at what they do but should leave cash flow management to the professionals, and of course, the banks finance products. Perhaps another accountant, CPA or CFO has told them they need better cash flow management policies. Or, sadly, cash is tight on a week to week basis and they are sure there must be some accounting or CFO tricks they are missing. Suddenly cash flow management turns into this mysterious complex science that only the experts can handle. Why don’t we solve some of the mystery.

Let’s start with some definitions. What is cash flow management? Simply stated it is the process of monitoring, analyzing, and adjusting your business cash flows. This is impossible to do without first having basic cash flow literacy. See my financial statements blog posting on The Cash Flow Statement for a better understanding of what the cash flow is vs. profits, and how the balance sheet and income statement must both be considered when analyzing cash flow. So, cash flow statement understanding and implementing some monitoring and analyzing tools are great ideas and all businesses no matter the size should be doing this on a regular basis, but it is NOT the #1 thing you should do today to improve cash flow.

The #1 thing you should do today to improve cash flow is work on improving profits. No joke. Especially in tough economic times every business has to focus more than ever on making sure the bottom line is not eroding. All cash flow management starts with profits. Notice I did not say revenues, but rather bottom line profit. Improving your long term cash flow is impossible without increasing profits in the long run. Cash flow management, forecasts and projections are necessary, but will only go so far if your profitability is falling.  If cash flow is tight, start by analyzing profitability. Is there a pattern of decreasing profitability? What has caused it?  Are revenues down, or are expenses up – hopefully not both, but we have seen it happen! Do you have a thorough understanding of what expenses are fixed and which ones are variable? If revenues are down, you have to hunker down and analyze, justify and if possible reduce every expense line item on your income statement. You may find yourself having to make some tough, outside the box decisions.

Also, do you know your break even points? How can you use that knowledge to improve profits? Do you know what product or service is the most profitable? What are the 20% of your revenues that are driving 80% of your profits?  Has your finance department ever run you through a cost/volume/profit analysis? If you lower your prices in order to sell more, how much more will you have to sell to actually improve profitability? What are the contribution margins of different locations, product lines, or services you offer? These are all questions that your finance department should be able to help you with.

So, as always, it’s first things first. Cash flow management, forecasting and projections can all have a positive impact, but let’s start with the #1 thing you should do today to improve cash flow today. Let’s start with profit improvement, and then move on to managing all the cash that’s coming in. Sound good?


**Short term cash flow forecasting is a non-negotiable service for all of our clients. It’s simply just part or what we do for them and we insist that the business owner be involved in a weekly short-term cash flow management/forecasting phone call. In that phone call we review their current cash position, expected cash needs in the short term (such as payroll next week, term debt re-payments in the next few weeks, etc), expected short-term cash inflows, and then required current cash outflows (weekly bill payments today, with the owner’s approval of course). If the owner is spending 15 to 30 minutes a week reviewing this information with us they are usually way ahead of their competitors as far as cash flow management. Once we have them there we push hard to move them to long term cash flow projections. This process first requires income statement projections (budgeting), balance sheet projections, and then a projected statement of cash flows. Only then can we see the long term cash affect of their plans and business goals. These are all great exercises and will have a positive impact on cash flow, and are all something you should expect from your finance department.