Positive Cash Flow Starts with Your Business Plan
Author: Laura Nelson, Senior Vice President, Small Business Banking
Cash flow is the heart of any small business. It’s at the center of how your business operates, supporting your ability to cover expenses, pay staff, invest in growth and everything in between. Without a positive cash flow, your business can’t survive.
Cash flow is the inflow and outflow of a company’s money. It enters your business as customers buy products or services and exits as you cover everyday expenses. The best way to decide whether your business is in a position to expand is to take a long, hard look at your cash flow and make sure you're managing it properly. But many small businesses make the mistake of spending without considering the future. For example, businesses often tie up money in excessive inventory instead of keeping it readily available to meet their short- and long-term goals and obligations.
Staying current on cash needs is a balancing act between paying bills on time, planning for the future and managing emergencies. Most successful businesses find this balance by building certain characteristics into their business plans.
Characteristics of Strong Cash Flow Businesses
- Low Overhead Costs
A business that is successfully managing its cash flow likely has low overhead costs, which means it doesn't spend a significant amount of money on fixed expenses such as rent, salaries, utilities or other operational costs. By keeping these costs low, businesses can allocate more funds toward marketing, sales and product development. Additionally, lower overhead costs mean businesses are less susceptible to cash flow problems in times of economic uncertainty.
A healthy cash flow business is scalable, meaning you can grow the business without pouring a significant amount of money into it. Scalability is essential because it allows businesses to expand operations and generate more revenue without putting a strain on their finances. Businesses that aren’t scalable can face cash flow problems as they try to grow, which can lead to financial instability and even bankruptcy.
- Recurring Revenue
Another key to maintaining a strong cash flow business is creating a source of recurring revenue, meaning you’re able to generate income on a regular basis without relying on one-time sales. Recurring revenue is essential because it provides predictable cash flow that businesses can rely on, even if times get tough temporarily. Examples of recurring revenue streams include subscriptions, maintenance contracts and service agreements.
- High Profit Margins
A healthy cash flow business has high profit margins, which means it generates a significant amount of revenue compared to its costs. High profit margins allow businesses to generate more cash flow from each sale, which in turn can be used to invest in marketing, product development and other areas of the business. Additionally, high profit margins make businesses more resilient to changes in the market or unexpected expenses.
- Simple to Operate
To maintain a strong cash flow, a business needs to be simple to operate. It should have streamlined processes, efficient workflows and minimal administrative tasks. By keeping operations simple, businesses can reduce the time and resources required to manage the business, which can improve cash flow. Additionally, simple operations can help businesses avoid costly mistakes, such as overproduction, missed deadlines or inventory stock-outs.
By modeling your small business to match these characteristics, you can monitor and manage your cash flow to maintain financial health, plan for the future and invest in growth opportunities. If you’re not satisfied with your cash flow, it may be time to reevaluate your business plan. Your business plan can act as an accountability tool for your company and can create a roadmap of goals and action steps that will allow you to weave in effective cash flow tactics and set your business on the right course.
Interested in correcting your business plan? Learn how with our step-by-step guide and template.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.