Happiness=Positive Cash Flow
I recently came across an interesting quote while browsing through the magazine rack in a bookstore. I can’t remember much about the article, but the quote was memorable:
“Happiness is a positive cash flow”.
The quote made me think about a very important concept that should be drilled into all entrepreneurs and small business owners from the earliest time possible. That important concept is cash flow. I believe cash flow is a concept that can be confusing to many, because it is easy to mix-up with other concepts like profit and sales.
What exactly is cash flow? In a nutshell, cash flow is the amount of money flowing into your business from sales and/or returns on investments minus the amount of money flowing out of your business used to pay for business expenditures and investments. It is vitally important to closely monitor cash flow and make sure it is positive. A positive cash flow means you have cash on hand at all times or the majority of the time in a given time frame. Having cash on hand is important because it means creditors, employees and others can be paid on time. In addition maintaining a positive cash flow is important because having extra cash on hand provides a small business owner with the opportunity to inject more funds back into the business. Such cash infusions can potentially generate even more cash and profits for your small business.
Now many of you are probably saying to yourself: “Of course cash is important, duh!” Unfortunately, many small business owners fail to realize how tricky it can be to have cash on hand and maintain positive cash flow. How is this possible? Well, consider this — you may be making big profits selling your goods or services, but still have a cash flow problem! How? Easy. Profits can be tied up in inventory, accounts receivable, or unavailable to you in whole because of a payment scheme that defers or staggers payment. Many small businesses have these problems, and as you can see from these examples, profits do not always equal cash on hand.
So, if you are a small business owner in the Philippines, what can you do to create a business environment conducive to maintaining a positive cash flow? There are a number of things you can try.
First, you can try to reduce the overall number of your accounts receivable. You can do this by offering small discounts to customers who pay in full up front. Many small business owners offer utang to their more regular customers. While this can sometimes help you close a sale, try to avoid this practice if possible and instead offer lower prices for up-front cash payments.
Second, you can take a careful look at your stock of inventory. Having too much inventory is a serious problem and can force a business into bankruptcy. Start tracking your inventory and streamline your ordering so that the majority of your profits are not tied up in excess inventory. If you know certain months of the year are busier than others, stock up only in advance of those months and lessen the size of orders ahead of those months you know sales become leaner.
Third, you can try and defer your own payments to suppliers. If a supplier gives you deferred payment terms, it means you free up more of your cash up front. You will still need to pay your supplier, but you can do so at a later date. This is helpful if your business is busier in some months than others. Pay up-front and avail of discounts on inventory just before the busy months and reduce your orders and try to extend payment terms during the slower months of the year.
Fourth, you can hold regular promotions and sales. Promotions and sales may lower overall profits, but they allow you to eliminate inventory problems and can result in increased sales that usually boost your cash balance sheet. I have a friend who holds a sale during the first weekend of every month! She not only has incredible sales at the beginning of the month, but she makes room for the latest inventory available for that month.
Finally, you can try talking to your banker to see if they have a lending facility for small businesses that require temporary funds while awaiting payments from customers who have bought with deferred payment terms. Many of the most business-friendly banks offer a revolving line of credit (RLC). A RLC can help you finance your short-term working capital requirements for the purchase or sale of inventory or can be used as bridge financing while you wait for the collection of receivables. Work only with commercial banks and stay especially far away from non-bank moneylenders. The high-rate of interest charged by non-bank lenders will eat away at your profits and usually worsen your cash balance sheet overall.
I hope this week’s column gets you thinking about ways of improving the cash flow in your small business. And always remember, cash is king!
Hi Bob - So right! Cash flow is a business’ life blood. Having the cash to pay your upcoming bills with some left over (profit) is what defines a business as a “going concern.” Unless it’s a going concern, an activity is not a business but, perhaps, a poorly enjoyed hobby.
Excellent article on cash flow. The utang system in PI is very common. What I am doing is charging more rent ( for events sponsored by the government), for my conference hall business in MDQ, since I will not received payment immediately (I get paid usually after 90 days). For events paying cash, I gave a 10% discount. This works good for my little business. Have a good day!
Hi Martin, you are so right. Most businesses fail due to mismanaged cashflow. This is even crucial for businesses who take more than a year to develop their inventory. A long-term cashflow projection or forecast is necessary in this case, but most small to medium sized business owners are not that focused on making projections. I am trying to set-up an accounting system here, and I am noticing a few things now that I would say “only in the Philippines”. I shake my head once in a while. Some things I can enforce change, but mostly, I have to work around the system if I cannot change the deeply-engrained habit.
Hi Paul- I just want to clarify that I didn’t write this article. It is from Martin Bazylewich.
Hi Paul,
Cash flow is indeed the life blood of every business! It also made me think of another point considering the turbulent economic times the world is in. With credit tightening everywhere, cash flow becomes even more important. Companies with positive cash flow will be able to weather these difficult times better than those companies that require credit to expand or stay afloat.
Thanks for your comment!
Hi David,
I really think it is great when current small business owners offer their insights here in the forum part of the Small Business File. I think your strategy is pretty sound. If you need to wait for payment, it is fair to charge a premium. And if you can entice others to pay up front, it always helps to offer a discount to build loyalty and promote continued patronage.
Thanks for sharing your ideas today, and hopefully we’ll here more from you in the future!
Hi Ellen,
Thanks for dropping by again! You bring up a really good point regarding inventory in that some businesses have a rapid rate of turnover, and others not. Managing cash flow in those small businesses without rapid turnover requires a very disciplined approach to monitoring cash outflows. I’m glad to hear you’re trying to introduce an accounting system that helps you track your cash flow and at the same time help you with projections as the business moves forward. In my opinion, too many small businesses in the Philippines fail to develop a solid accounting system early enough in operations. This generally results in missing opportunities they might have otherwise been able to seize upon, or worse, causes the company to jeopardize what had been up to one point been a healthy cash flow.
Good luck, and thanks for your comments!
Hi Martin - I am in the middle of planning a move to the Philippines and it is has really motivated me. Even before I found this Blog I knew that I needed to have regular cash flow from the states before making this move. Reading this Blog confirmed such is true.
Funny thing, it took the idea of moving to get me in gear to increase my cash flow. I already have an online business that I make money on but I would like another one or two before I move. Don’t yet know if they other two ideas will work but I find it odd that my mind was at “rest” for so long and it took the moving to become creative. Perhaps it is because I felt secure living in America that allowed be to be stagnant.
Any business I start will be service orientated with low operating costs. Bob had an post about working out a deal with the local hotels to make some extra money by sending his site visitors to them. I realize that is not the business Bob is in but that is the type of business I run. Bob.. if you are reading this can you update if you worked out any deals and if so how is it working?
Hi Mike,
Thanks for your comments. It’s funny how impending moves cause many of us to become introspective and take a good, honest look at where we are, and where we want to be. Only by doing so can we really ’see’ what needs to be done to get from point A to point B. I think every small business owner should take time to reflect on things and try and see how they can make small improvements at regular intervols.
I’m glad you’re looking at ways of expanding your cash flow possibilities. Depending on how established your current online business is, you may want to either: (1) concentrate on your current ‘bread-and-butter’ business and make sure it is really running smoothly and providing a fairly consistent revenue stream; or (2) if you already have a very well established online business, then perhaps it is time to look at developing a complimentary online business that can feed into your mainstay business. This will offer you opportunities to cross-market your services and not distract you from what you already do well.
Best of luck in your future move, and thanks again for sharing your thoughts!
Hi Martin,
Nice reply, thanks! The reason why I am trying other revenue ventures is while my current online business is making good money I am not sure it will maintain while I am not in America. Even if it can not being in America will mean the odds of it growing would be very slim.
One of the other business ventures I am developing is in the same field of the one I have running. The difference being I can live anywhere in the world. Not sure what will work but I will find out. This is the reason I cannot pick up today for my move to the Philippines. I will continue to post and learn from this site and you can visit my site for my progress.
~Mike
[...] my earlier article from October 13th titled “Happiness is a Positive Cash Flow”, I touched on the issue of inventory management and how it related to cash flow. In this article I [...]