Cash Flow Management and the Growth Conundrum

It seems intuitive. Increased revenue means increased profits, right? Of course this may be true in the simplest of cases but it’s typically wrong. The fact of the matter is that increased growth means increased complexity, and with this increased complexity there is a need for stringent cash flow management.

Growth Vs. Cash Flow

The New York Times best selling author, Michael Hyatt points out that there is a difference between rapid growth, like cancer, and healthy growth like normal cellular production. Drawing from his own experience, he said he learned the lesson to “never let growth exceed his own ability to fund it. He stressed this by saying, “if I am tempted to seek outside funding, it is a sign of a flawed business model.”1 When faced with cash flow problems, most businesses see growth, either in terms of revenue or funding, as the solution. However, growing in these areas only increases expenses, accounts receivables, and operation demands which will sink your business if not managed by a CFO

Profit Vs. Cash Flow

Being profitable and having positive cash flow are not the same thing. Profit, as defined by the rules of accounting, is simply revenue minus expenses, but notice that Invoicing a customer for products or services you sold them creates revenue. Your P&L can show you are a profitable company, but unless you turn your accounts receivable into cash, your company is at risk of falling apart. Remember, at the end of the day, cash is king.

Achieving a positive cash flow while growing does not happen by chance. You have to consistently work on it. This means you need to perform the right cash flow analysis at least once a quarter. In fact, Alan Knitowski, the CEO of Phunware has his controller provide him reports  on the daily so that he could be on top of the firms cash flow management2

By having these reports Alan knows exactly what he needs to do to direct his company to success and sustainability.

Here a few ways regular cash flow management can help your business succeed:

  • Increasing the likelihood that your business never runs out of cash.
  • Eliminating the constant worry associated with not knowing what your cash balance is right now or what you expect it to be in the near future.
  • Improved relationships with your vendors because they are no longer banging on your door demanding that their past dues invoices be paid immediately.
  • The ability to see cash flow problems long before they can happen

At TOP CFOS we are dedicated to providing the most detailed cash flow analysis, going beyond merely creating reports but showing finding what the numbers mean in them. Click here to get a free complementary cash flow consultation.

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