Cash flow literacy basically means understanding the concept of cash flow management, why it’s important, and how to optimize it for your clients’ businesses so they also understand the importance. Clients must be engaged and aware of how cash flow moves and shifts.
Most importantly though, it can be tamed if you understand it, is an ever-changing animal.
To teach your clients about cash flow literacy, you need to understand what it means yourself. In short, it can be broken down into seven elements:
2. Sales/marketing expenses
4. Additional expenses
6. Accounts receivable
7. Accounts payable
Read on to learn about how each element affects cash flow.
Revenue is the most basic element of cash flow. It’s when your business “makes money.” Ideally, increasing revenue should in turn, increase your cash flow. If this is not the case, decreasing calculated burn had better be part of your business strategy, otherwise you’re basically hemorrhaging money.
Again, sales and marketing are expenses that should generate revenue. Basically, spending money to acquire new customers should cost less than those customers are spending at your business. Therefore, sales and marketing expenses should be monitored constantly to ensure they are driving growth.
COGS or the Cost of Goods Sold, is an expense to acquire or produce your products (including packaging and shipping, if applicable). COGS should NEVER be more than the price of the final product unless you’re clearing out stale inventory that is taking up space where more valuable pieces could be stored, but this is a topic for another day.
Basically, the smaller the COGS, the better cash flow.
This could include staff, rent and other overhead expenses, and services your business requires (like accountants!). Try to minimize additional expenses as they also eat into your cash flow.
Of course, profit is a huge driver of cash flow and is calculated by taking all the incoming funds (revenue) and subtracting the expenses for a certain period. This would all appear on the Income Statement in accounting. When revenue > expenses, cash flow is positive.
Accounts receivable is money that is owed to your business but has not yet been collected, like outstanding invoices on net terms. Your revenue may state the total of billed invoices but if the customer doesn’t pay, your cash flow will decrease, and this is less than ideal. This can be avoided by offering small discounts for on time or early payment, or by only offering services/goods for upfront payments.
On the other hand, accounts payable is the amount that your business owes other companies like suppliers and other bills. You want to time these payments so that not all your expenses occur in the same month. By spacing out your payments or taking advantage of early payment discounts with some suppliers, you can better manage your cash flow so that it’s always in the positive and not locked up in invoices.
Every business depends on cash to survive. It needs constant and close monitoring. Get to know your cash flow by examining these seven elements every week.