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  • Writer's pictureLine Ettrich

Are You Managing Cash Or Is Cash Managing You?

Cash is king. You've probably heard it a million times before, so I won't bore you with the details of this infamous slogan. Instead, I want to jump straight into the "who rules who" dynamic. Are you the "king of the kings" who rules over cash? Or do you feel like a servant at the mercy of your bank balance?

This is the daunting question every business owner should answer within a heartbeat. Before you form an answer in your head - I'm not only talking about the obvious symptoms, like struggling to pay an invoice, settling your tax bill, or working with a devastatingly low cash balance. Cash flow management isn't just about making more than you spend or building a massive pile of cash. It's also about managing your growth opportunities and reacting to unexpected issues whenever they come around - with ease and without having to break your bank. Now - are you checking all those boxes?

There is only one way to find out. You need to put your cash flow under a microscope and dig for the 3 tell-signs that set true cash flow leaders apart.

Why You Need To Rule Cash

Easy. It's almost a mathematical certainty that unmanaged cash flow will run your business to the ground. But hold up, one step back. Let's start with what cash flow actually is. Cash flow is the misprized companion of profit that does a lot of the heavy lifting when it comes to keeping your company afloat. It's the money that moves through your business at any given point in time. Money that actually exchanges hands. Sounds pretty intuitive, right? Well, it is, with one slight caveat. Cash flow increases or decreases result from three different areas:

  • Operating Activities: The core functions of the company, like getting paid by customers and paying your suppliers, employees, and income taxes

  • Investment Activities: The purchase or sale of investment assets, like stocks, bonds, and equipment

  • Financing Activities: The influx of capital from outside parties, like loans, investments, or interest

For this analysis, we're only interested in the first - operating cash flow. It is one of the most important pieces of your cash flow statement because it determines whether you have what it takes to stay in business. If your company isn't generating enough cash from its core, you'll have to tap into the pockets of investors, banks, or, well, yours. Otherwise, you won't be in business for long.

The 3 Symptoms You're Being Ruled By Cash

Whether you’re in control or not, depends on your answer to these 3 simple questions:

  • Is my operating cash flow consistently positive?

  • Is my operating cash flow topping profits?

  • Is my operating cash flow growing quicker than profits?

If you are reading this, answering “Yes, Yes, Yes” and laughing derisively at those questions, then this blog post might not be for you. You must be managing your operating cash flow like a boss! If not, don’t worry;' we’ll get you there!

1. Is operating cash flow consistently positive?

With cash flow, you can be in two spots - positive or negative. You either have more money coming in than going out (positive) or more money going out than coming in (negative). Now, I don’t need to tell you what side you’ll want to be on.

If you're operating cash flow is CONSISTENTLY negative, your alarm bells should be going off - you’re in trouble compadre! Most businesses have been or will be cash flow negative at some point, whether that’s because they are just starting out, have a seasonal sales cycle, or the economy is just not playing along. However, trouble sets in when you stay in the red.

2. Is operating cash flow topping profits?

Now we're bringing profits into the equation. The money you actually get to keep from your sales after all your expenses have been deducted. Because profit wrongfully assumes that all the revenue and expenses are received and paid at the exact same point in time, it gives us a great benchmark for how well you are using and timing your cash in and outflows.

Check your operating cash flow and check your profits. What is higher? If the answer is profit, your cash is tied up somewhere with inventory, customers, or suppliers. Not ideal, right? It’s sitting there, and you can’t put it to good use.

3. Is operating cash flow growing quicker than profits?

This question might appear similar to the previous, but it unravels another sign of cash flow mastery. The growth rate tells you how well you're managing operating cash flow over time - whether the distance between cash inflow and outflow is growing or shrinking.

If your profit is growing quicker than operating cash flow, it means that you are becoming less and less productive because it’s taking you longer to recover the cash from your investments. Or, in fancy finance terminology, your operating cycle is increasing.

It’s all about timing!

If you answered no to one, some, or all of the questions above, something isn’t going quite right. The reason is simple - your timing is off. With cash flow, it’s not only about how much you spend versus how much you bring in - it’s all about the when. What I am hinting at here is the infamous cash conversion cycle. An equation that captures the time between spending money on crafting your stuff and getting the cash from selling it. For this article, I’ll simplify this finance equation:

Cash Conversion Cycle (in days) = The time it takes to sell your inventory (+) The time it takes customers to pay you (-) The time it takes you to pay your suppliers

Let’s add some more flavor to that with a visualized version:

With the basics under wraps, let’s figure out where it’s going wrong and how you can change the tide.

1. Find The Cash Trap

Hick-ups with your operating cash flow can be caused by 3 not mutually exclusive reasons - you are overstocking on inventory, paying suppliers too quickly, or customers are paying too slow. To get to the bottom of your issue, you'll need to compare your profit with your operating cash flow. By calculating the differences between the two, you'll figure out where all of your cash is sitting. The following is a simplified example of that:

2. Choose Your Tactic

Now that you have identified where the cash is tied up, you can start looking at tactics to address the problem. To keep things short and don't exhaust our human attention span, I summarized it in the following table. It's not all-inclusive, but it's a start.






​High Accounts Receivable

Low Accounts Payable

High Cost Of Goods Sold


Get clients to pay faster

Get more time to pay bills

Minimize the inventory on hand


Change payment terms, offer early payment discounts, require a deposit (or one of the 100 other options)

Pay bills right before the due date, renegotiate payment terms

Forecast inventory, allow for pre-orders, sell of old inventory at a discount


Set a new payment standard with clients: ‘All my clients pay me 50% upfront before I do any kind of work. I can’t just change the rules for you, or everyone will want the same treatment. That really wouldn’t be sustainable for my business.’

Position longer payment terms as a mutual benefit. “I want to grow my business, but to make that happen, I need more time to pay my bills. If we can make that happen, I’ll also start buying more from you, which would benefit us both.”

Only keep the minimum amount of inventory and position a shortage as a high-demand item. “We are currently out of stock, but if you pre-order now, you’ll be the first to get it when it comes back in stock”.

Once you've decided on the best course of action, all that’s left to do is execute and monitor. YAY!

Get Control Of Your Empire

If you want success, cash flow management is a process you will have to master. That means getting your customers to pay quickly, managing your inventory levels to perfection, and taking your sweet time when paying your suppliers. If you get all that under wraps, your operating cash flow can be consistently positive and strong, giving you more financial freedom. On that note; Ready, set, go - Let the cash flow! 🤑

P.s. If all that sounds like a lot, Veriply can help. Get your free account and discover how simple it can be!

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