This article will help you create positive cash flow, most cash flow creation doesn’t involve increasing our revenue but instead in uncovering the cash that’s already there. These five strategies will help you create operational cash flow. A plan is only as good as our execution, and I hope you translate this knowledge into action.
In this article, we are going to show you how to do your own operational cash flow analysis.
Which do you think will take more work, increasing revenue or cutting expenses?
Which will give you a more significant profit?
If you guessed increasing revenue, then you guessed wrong while selling more product services impacts our income, it takes more work and can sometimes increase expenses. The biggest key is, it’s not sustainable. You can increase your sales consistently, but to continually improve, it requires considerable effort.
Cutting your expenses gives you an immediate increase in revenue, and it’s consistent, but parting ways can be harder than we think when its things we need. Apart from cutting back on things we don’t need, there are additional strategies that can help keep your cash flow positive.
Cut expenses and costs
If you’re going to cut expenses, then you need to decide what’s a cost, loss, or investment, your operational cash flow analysis starts here. Accounting is a necessity because it gives you insight into your business activities, charges, and expenses eliminated from your business. Investments are what matter most. A good investment provides us with a return, and a lousy investment becomes a cost, fees offer no gain, and a cost is a loss.
You’ll receive the most impact on your business by cutting your expenses and costs, to achieve the same result in sales, you will have to work twice as hard.
Some expenses can’t eliminate like taxes, but with the right tax strategy, you can reduce the fee your business pays.
Increasing your sales isn’t viable because you’ll need to sustain the transactions to keep your revenue consistent. While increasing sales is a great strategy to adopt the short term, eventually the purchases start to fall off, and a new sales strategy is needed.
Unless you’ve hired and trained a sales team, you’ll be making the sales.
Subscriptions are the easiest to cut and are giving your business a recurring loss. Reducing costs is the next best way to cut expenses; instead of eating out for the week you can meal prep, instead of driving you can ride a bicycle, we can reduce spending all around us. If you’re unsure, financial business coaching will help guide you, contact us at our high desert location.
Sell or lease
If you have an overflow of inventory or equipment you have options, you can sell or lease to save space and increase your operational cash flow.
One of the biggest obstacles a business faces is inventory. If you don’t sell stock, you will likely have office inventory. Managing both is crucial for your business. Operational cash flow translates into supplies, but most supplies don’t always bring a return.
When selling inventory, it’s essential to have a system that can both minimize damage or losses from a product bought and accurately track the individual movements of pieces. Tracking your inventory gives you the oversight to fix any problems created from human errors.
It’s essential to manage your inventory as it takes up space as well; most businesses that sell stock keep their inventory stored elsewhere. With multiple locations, the importance of tracking inventory is evident, saving business owners time and money.
Eventually, all the equipment gets old. Some can be donated while it’s better to sell others. Donations should be tracked and reported come tax time. While not large, you can receive a write off for items donated. The space you use to store the inventory can also apply to the business come tax time.
If the inventory isn’t sold to the general public, you might be able to find a private seller who would buy it at a lower cost, receiving part of the principle is better than receiving none.
Plan and project
If you own a business, you must plan and project your financial situation, if you don’t, please reach out to us so we can guide you. It amazes me how uncomfortable we are with our lives, and at the same time, we spend little time planning them.
“What do you want to be when you grow up?” What did that question bring to mind? A kid, of course, it’s a common question shared by many.
How many times did you revise your answer? For me, not at all, not until I turned twenty-six. Our career is a huge choice. Some others are: where to spend our leisure time, what to do with our money, interactions in our relationship. The list goes on.
Failing to plan in our life won’t ruin it, but it would be quite the ride. Failing to plan and project in your business affects your operational cash flow. Without planning and projecting, we’re responding to the events in our business rather than being proactive.
Whenever I work out, I need a plan. If I don’t have a project, I’ll do a couple of workouts and leave. When I follow a workout program, I come to the gym with a list of exercises and end up staying with the whole six-week program.
We know how much operational cash flow our business needs, but the curse of intelligence lies in knowing. When we know what we need to do, we often avoid what we need to understand. The curse of information is that it breeds ignorance; let’s consider the black-box model.
The black box
The black box is a device, system, or object viewed in terms of inputs and outputs without an understanding of its internal workings. The human mind is a black box, we don’t understand all of the inner workings, but we know how inputs can affect outcomes.
We are always surrounded by black boxes: the human mind, the human body, computers, cell phones, and even our vehicles. All of them are black boxes, and while we understand the outcomes generated by our decisions, we don’t fully understand the process we undergo.
Although we don’t fully comprehend the black boxes that surround us, we continue on our daily lives with trust and certainty that they’ll work. The term black box can be applied because the programs executing our outputs aren’t examined.
The point is that the world is complex; it pays to be honest about things that will affect our future, especially if they’re essential.
The right tax planning strategy will put money back in your pocket, tax planning has grown to the complexity of tax planning strategies, but the essentials of tax planning is what will help your business. Taxes aren’t something to avoid, and they’re something that companies can minimize.
A decrease in taxes owed gives us operational cash flow for investments or to place into a growth vehicle. The excess is to help scale our business, hire help, or take a vacation. It’s up to you. But if you don’t plan, you’ll never see the change.
If you ask questions about taxes, you’ll quickly discover how little you know, I know many people who no longer receive deductions they claimed in previous years, but their tax strategy doesn’t change. We won’t discover how to pay less in taxes if we never change our strategy, insanity is doing the same thing over and over and expecting a different result.
Most of us forget about taxes unless we are receiving a refund, the time we take to plan our taxes, is well worth it. If you’re interested in discovering how to pay less in taxes or implementing the right tax strategy, book a call with us today.
Restructure payments and collections
When starting a business, I bet restructuring payments and collections wasn’t on your list of things to revisit. Operational cash flow is the amount of money you have access to right now, physical cash. To increase your control over operational cash flow, we’re going to revisit payments and collections.
The accounting term for these accounts is payables and receivables.
Account payables are your payments. These payments are other business collections or accounts receivable. These aren’t just account, and they’re people, one of the best things you can do for your account payables is to pay everything on time or early. Send gifts, get to know the person you’re sending the payment to, and always give a little extra.
The more of a relationship you build with your account payables, the better business relationship you’ll have and ultimately better business. If you’re not paying your business bills early, start.
Account receivables are our collections. It’s the payments owed to us by our clients and customers. Problems in operational cash flow are in a business’s ability to collect payments timely.
Operational cash flow decreases when we don’t receive our payments on time. By doing an operating cash flow analysis, you’ll know if your account receivables are the culprit doing damage to your business. Businesses run a risk when they’re unable to collect payments because they still have to pay the fees their company owns.
High interest savings account
Your business should be investing excess cash for growth, operational cash flow allows us flexibility, but it won’t grow our principal against inflation, you can use high-interest savings account to achieve your financial goals.
High-interest savings accounts give your business liquidity, which means you can access it whenever you would like. It’s important to have liquidity with operational cash flow. The longer it takes you to trade the intrinsic value for cash, the longer you’ll be negative cash flow.
Cash is the standard for liquidity because it can most easily convert into other assets, with a high-interest savings account, the asset that’s growing is the capital invested. Most businesses consider how they will make money, but business isn’t a one-time transaction. It’s a consistent flow that creates cash flow.
A business with negative cash flow has little freedom to operate at its potential, while a company that possesses positive cash flow isn’t worried about cash. Operational cash flow gives a business owner the freedom to make strategic decisions that will help the business.
Repeat business is your current customers. These are the people you’re already happening; they likely have more problems that need to be solved. The best thing about repeat business is the relationship is there; you are already over the biggest hurdle, trust.
Increasing operational cash flow solves one problem but creates new ones. Most issues aren’t linear, and they’re complex in nature, it takes a complex solution to solve a complicated answer. More cash on hand increases the likelihood of spending it. Think about when you got your first raise. You spent the extra money for the first few weeks, I bet.
It’s normal, the money isn’t visualized as apart of our consistent income but a small bonus, the same thing happens when we have excess positive cash flow. This money should go to paying off old debts, loans, or invested in a high-interest savings account.
The point is, if you’re solving a problem for your customers, it’s creating new problems that you can solve. Reach out to your current network and dig into what they’re currently undergoing, it’s easier to observe a system from the outside than it is within, you only need to ask the questions.
If you’ve already talked to your current customers, then it’s time to tap into your direct network, although you might not have conducted your business with them, you’ve built a relationship and are already doing business on a personal level. You might be surprised how valuable your information can be for the people closest to you.
Helpful business tools
Your cash flow statement is a helpful business tool for you to view your current cash flow status. This statement shows how changes in balance sheet accounts and income affect cash and cash equivalents. The cash flow statement breaks down the analysis of operating, investing, and financing activities.
Your profit and loss report is another valuable and helpful report that shows you how your business operated within a given time frame. If you don’t have these reports you’re doing your business a disservice, these reports allow you to identify friction and make any necessary changes.
In accounting, these reports organize your financial activity, in business these reports tell a story. What story are your reports telling?
Operational cash flow is a position more than it is a goal, sometimes you’ll need excess cash, sometimes you won’t, but if you build positive cash flow, you have more flexibility. Every business operates on a cash metric, and cash flow is the variable that helps a business thrive.
There are several things you can do to increase your cash flow, but the first and most important is to complete a full analysis. After the review, you can identify any holes in your business that are currently losing money; if you need assistance, please don’t hesitate to reach out.
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