Opinion: Time for cash-flow health check?

Travis Beazley

One of the most important pieces of business is knowing what data to track and analyze.

There is a saying that goes, “Revenue is vanity, profit is sanity, but cash is king.” For small businesses, cash flow is essential to the company and its continued success. It is used to keep the lights on, pay employees, purchase inventory and keep the company in a solid position.

Nearly 40% of small businesses would have to close their doors within two months after cash flow dried up, according to a 2022 survey by Fundbox.

Nationwide statistics indicate that 82% of small-business failures result from poor cash flow, according to a U.S. Bank study cited by Fundera.com.

Another survey, performed by Viably, found that roughly two-thirds of business owners review expenses and revenues, but only 45% review cash-flow statements.

While revenue, expenses and cash flow may not be the most exciting part of owning a business, they are critical indicators of a business’ financial condition.

State of business
Revenue and expenses make up a profit and loss statement, and business owners should use that as a tool to analyze trends and ultimately make informed business decisions.

As bankers, we analyze P&L statements for trends and profitability, but ultimately to measure ability to repay, which is one of the most important factors in evaluating creditworthiness.

Some things that should be of equal importance to business owners are the timing of revenue becoming a source of cash, an expense becoming a use of cash and the many other sources and uses of cash.

In short, that defines cash flow – the amount of cash that comes in and goes out of a company.

Small businesses must carefully manage cash flow to survive and grow. When a small business takes the time to understand, plan and forecast cash flow, the odds of that business surviving significantly increase. Managing cash flow is about awareness, analyzing and planning. Good cash management means a small business is consistently aware of its cash flow and uses cash-flow tools to analyze and understand the current and forecasted state of its business.

A business with strong cash management can effectively fund operations, negotiate optimal terms with vendors and creditors, and strategically grow operations.

Cash needs
As a banker, a tough call to receive is, “If I don’t get a loan by the end of the week, I will not be able to make payroll.”

To the contrary, a call we would be excited to receive is, “I have identified some growth opportunities and cash-flow needs. Can we set up a time to discuss lending options?” Each call ends with the same result: I need money. The key difference is timing of when their cash need is identified. In the first example, it was days before, and in the second, it was months earlier.

There is a saying that I heard early in my banking career that goes, “You would loan me the money if I didn’t need it.” This is based on the idea that if all is going great, a business would not need to borrow money, yet they should easily qualify based on their current financial position. With strong cash-flow management processes in place, a business can take advantage of this and be strategic about how and when they seek financing.

Timing is everything
Good cash-flow management certainly will not solve every problem a business encounters, and even the strongest businesses can run into cash needs. However, when cash flow is managed effectively, a business will be able to plan and forecast those needs.

There’s a big difference between needing cash now and needing cash in six months. In the end, “Revenue is vanity, profit is sanity, but cash is king.”

Travis Beazley is senior vice president of SBA lending for Guaranty Bank. He can be reached at tbeazley@gbankmo.com.