Capital is an important factor of production; it is inevitably required to drive the strategy and success of a business or any creative enterprise. Hence, it is no brainer why most companies tend to prioritize cash flow among other things. However, too much emphasis on cash flow can be counterproductive to the business.
Cash flow is to the business what blood is to the body system. For instance, an injury in any part of the body preventing proper flow of blood through that area can have a ripple effect on the entire body system. Likewise lack of proper cash flow to adequately fund the execution of the marketing plans of a business will affect sales performance and this may result in employee demoralization due to delayed remuneration.
Cash flow is like a heavy rain; when proper channels are not created for the waters to flow through, problems such as erosion or flood may develop, therefore causing the environment to be inhospitable to the plants, animals or humans that are supposed to flourish or grow in that environment.
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Many small businesses have failed not necessarily because of a lack of cash flow but due to cash flow trap. Cash flow trap entails a false consciousness that a business is doing well due to massive inflow of cash or funds from shareholders’ investments. This kind of mindset reinforces a lavish tendency of small business leaders. Usually, it is lack of clarity or inability of the business owners to distinguish between profit and cash flow that subjects them to the cash flow trap.
Therefore, Cash flow management is an essential skill for business managers to lead a successful business. Central to cash flow management is financial literacy which is the ability to read numbers and make business decisions based on numbers or data or facts. ‘’The ability to run a company from the financial statement is one primary difference between a small business owner and a big business owner’’ argues Robert Kiyosaki in his Rich Dad financial handbook entitled, Fire Yourself.
The following are recommended cash flow management tactics and how they can impact the financial performance of a business:
- Reviewing the business cash position daily and considering the business cash needs and sources for the week, month or quarter ahead allows managers to plan for any large cash need before it becomes a cash crisis.
- For businesses at the initial startup stage, practicing delayed gratification such as delaying personal rewards or making expenses that could wait until the business generates cash flow from sales helps to avoid overdependence on shareholders’ investment.
- Positioning the business for a multiple source of income through intrapreneurship fosters more creativity and liquidity.
- Ensuring a easy but secure payment system increases conversion rate
- Having investment plan for the cash at hand helps to maximize its earning potential
- Establishing good internal controls on the handling of cash averts leakages and shrinkages.
Regarding internal cash control, Robert kiyosaki suggested the following:
- The people who record the cash receipts on the bank deposits should be different from those who post it to the accounts receivable and general ledger.
- Also, the people authorized to sign checks should not prepare the vouchers or record the disbursements and post to the accounts payable and general ledger.
- The person who reconciles the bank statement should have no regularly assigned functions related to cash receipts or cash disbursements.