To understand the dynamics of small business management, you need to look beyond your revenues and focus on how quickly cash flows through your organization. Because, if your company comes up with insufficient cash to operate at the end of the month, it really won’t matter that your business’ earnings hit a new high the month before. That’s why you need to keep your eye on your operating cash cycle to get a better gauge on the health of your cash flow.
The Lifeblood of Your Organization
The operating cash cycle represents the length of time your cash is tied up in working capital, including the inventory cycle and the accounts receivable cycle. For most businesses, it takes somewhere between 40 and 60 cents in working capital investment to generate one dollar in new revenue. This is the basic premise behind achieving sustainable growth.
Your growth capacity is determined by your working capital surplus. But the “timing of cash” is also a factor. Operating cash cycles are the circulatory system of your business. If cash is not flowing smoothly through the system, the patient weakens. If cash flow stops all together, the patient’s viability is at risk.
To gauge the strength of your current operating cash cycle, ask yourself the following questions:
- How would your day-to-day operations be impacted if your clients made their payments within 24 hours of receiving your invoice?
- How would truly predictable cash flow affect the ability of your company to add staff or other resources?
- How would paying all accounts within five business days impact your ability to negotiate better prices and discounts with your vendors?
If you are like most managers, answering these questions led you to a better place than you are right now. Once you know when you will receive payment, you no longer need to juggle payables and other business obligations. You begin to control your cash flow rather than being controlled by it. That’s where the value of having a predictable cash flow leads.
The Benefits of a Predictable Cash Flow
Business owners typically realize five major benefits from achieving a predictable operating cash cycle.
- Reduce managerial stress. Just as with personal finances, a lack of money can lead to stress in a business. You start to worry about your employees just as you would your family.
- Build stronger business relationships. Once you take control of your operational cash cycle, you can begin to nurture valuable relationships with both vendors and clients. This can often lead to earning better pricing through prompt payment.
- Experience debt reduction. Predictable cash cycles in a business enable you to pay down term debt more quickly, as well as other short-term obligations. In time, your business can become totally debt free, and, as an owner, you become an investment and cash management client rather than strictly a borrower.
- Improve staffing flexibility. During times of uncertainty, the last thing a business owner wants to do is commit to paying annual salaries for new employees. Predictable operational cash flow enables you to hire with confidence as growth opportunities arise.
- Realize growth in sales. Businesses must have working capital to support expansion. By making operational cash cycles more predictable, one key barrier to growth is removed. Consistent cash cycles provide you with the opportunity to expand your sales more easily, given market demand.
To gain firm control of your operational cash flow and the resulting benefits of predictable payments, Old Second offers business clients access to the BusinessManager® program. This online program allows you to get cash for your accounts receivable deposited directly into your bank account by selling them to the bank at a discount. Essentially, it allows you to quickly turn your invoices into cash, makes your cash flow more predictable and enables you to negotiate better terms from your suppliers. The result is a much stronger operating cash cycle and healthier finances.
To learn more about this game-changing program and the other cash management strategies available at Old Second Bank, contact your lender to set up an appointment. We can’t wait to show you the difference it can make.