Politics & Finances

The Worst Advice We've Ever Heard About Cash Flow

The Worst Advice We've Ever Heard About Cash Flow

According to a study conducted by the United States Bureau of Labor Statistics, roughly one-third of all businesses will fail within the first two years. Half of those that remain will fail within five, and only the remaining one-third of that total will survive to ten-year mark. Interestingly enough, according to a study conducted by U.S. Bank, an incredible 82% of these businesses all fail because of the same simple reason: cash flow.

It's important to know that cash flow problems do not discriminate and, indeed, the aforementioned statistics are true regardless of the size of the business you're talking about, the industry they're operating in, or the customers they were built to serve. So for something so important, it's shocking that it's a topic so filled with such downright poor advice.

What follows is a discussion of some of the worst advice we've ever heard on the topic of cash flow, which will be of particular use, especially to small businesses.

Bad Advice: "Timing Doesn't Matter."

Remember that if you're only paying attention to the total amount of money coming into and going out of your business, you're only examining one part of a much larger whole. Just as important is the idea of timing, ESPECIALLY if you're a business that operates on an invoice-based payment system.

Even if you're a successful business on paper, you could still easily run into trouble if your invoices aren't getting paid until AFTER those loan payments start to become due. This can cripple EVERYTHING – from the amount of new product you can create to the rate at which you can continue to expand. Anyone who tells you that the timing of your cash flow isn't important is someone who you shouldn't listen to for advice.

Bad Advice: "Profit and Cash Flow Are the Same Thing."

In a very basic way, this actually seems to make a certain degree of sense. After all, if you've got enough money coming into your business that you're turning a profit, you MUST also have a positive cash flow as well, right?

Wrong.

Remember that profit is simply defined as "the difference between the amount you've earned versus the amount it took to buy, to operate or to produce your product or service." Cash flow, on the other hand, takes into account EVERYTHING – from the amount of unsold inventory you're paying to house to capital expenditures, your debt, accounts receivable, accounts payable and so much more. A mistake in any one of these areas (or failing to pay attention to them to begin with) can quickly offset the gains you THINK you're making in terms of sheer profit alone.

Remember that if we lived in a world of paper, you would be making a profit as soon as you send out that $100 inventory to a client for a product that cost you $75 to produce. Actually collecting on that invoice, however, is what plays into your ultimate cash flow.

Bad Advice: "If You Want to Increase Cash Flow, You Need to Increase Sales."

Yes, this also makes sense – if you're trying to bring more money into your business, selling more products or rendering more services is one way to do that. It is, however, only ONE way to accomplish that goal. Consider pricing discounts, for example, where you give loyal customers a deal if they pay early. You're not necessarily increasing sales, but you ARE increasing the frequency at which you're paid – positively affecting cash flow at the same time.

Horrible Advice: "Cash Flow is Today's Problem."

Finally, one of the biggest problems that many small businesses, in particular, deal with in terms of cash flow involves living too much in the present and neglecting to think about the future. Yes, having a negative cash flow today is a problem. However, this isn't a problem that you can fix overnight.

Maintaining a long-term positive cash flow requires you to get that flow under control, which demands that you start making strategic decisions today that might not pay off for another month, two months or even six months from now.

ALWAYS look to the future in terms of your cash flow, or you'll wind up making decisions today that create a very bumpy situation for your business down the line.

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Sherri Hastings

Sherri Hastings

Tim Murphy is the managing member at Murphy & Murphy, CPA, LLC, a full-service certified public accounting firm, with emphasis on tax preparation, audits of governmental, educational, and non-profit entities, retirement planning, estate planning, business valuations, litigation support, and banking. He is a Certified Public Accountant in Maryland and Virginia. Tim is also a CERTIFIED FINANCIAL PLANNER professional, Personal Financial Specialist, Accredited Estate Planner, Certified Valuation Analyst, and Investment Adviser Representative.

MURPHY & MURPHY, CPA, LLC.
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