While there are a lot of factors in a small business's success, cash flow is one of the most prominent. A positive cash flow can be the difference between just surviving and actually thriving.
Research shows that the vast majority of businesses that fail do so, at least in part, because of cash flow problems. Cash flow refers to the amount of money coming in and going out of your business.
To be successful, you don't just need more coming in than going out; you need to make sure it is coming in when you need it to so that you have money on hand to pay your bills and employee salaries.
As senior vice president for small business at Mastercard, Jay Singer knows just how important cash flow is to a small business's success. Singer has been with Mastercard for more than 20 years and served in a variety of roles, including as senior vice president and group head for North American commercial products and as senior vice president and group of U.S. commercial products. Prior to joining Mastercard, Singer was a senior manager at American Express.
We recently had the chance to speak with Singer about cash flow, its importance and the steps you can take to boost it.
The importance of cash flow
Q: Why is having positive cash flow important for businesses?
A: Positive cash flow means you have an opportunity to grow, make new investments in your business, innovate and ultimately continue doing what you've been doing – satisfying your customers.
To get here, it's important for your business to have a tool that aggregates all of your financial data (e.g., account, balances, receivables, collections and invoices to pay) to provide a complete view of your business's financial position. Cash inflow is the lifeblood of every business, fueling all aspects of operations, from employee salaries to electricity; and for many business owners, keeping the lights on – literally – can be a juggling act.
Q: What can happen when a business doesn't have proper cash flow levels?
A: Worst-case scenario, it can fail. In fact, research shows that 82% of businesses in the U.S. fail due to cash flow issues. Low or negative cash flow scenarios put a business in serious jeopardy.
Even with a profitable, sound business model, small businesses need an effective cash flow management solution in place. Most small businesses in the U.S. have only 27 days of cash on hand. Improper cash flow levels can hinder a business's growth and impact the returns for the small business owner.
Q: How do you determine how much cash flow your business needs?
A: To determine the amount of cash flow your business needs, you first need to analyze the current state of your business. It's important to understand how much cash you've been using and plan to use, as well as the length of time it will take to acquire more cash.
While every business's needs are different, it would be wise to have enough cash on hand to cover up to six months of your average cash outflow.
Q: Do certain types of business, or businesses in certain industries, require more cash flow than others?
A: Every business's situation is unique, and there are two key factors at work here. The first is the stage of the business – startups or growing businesses generally need more cash to support their development and cover expenses such as inventory, infrastructure and employees, compared to more established businesses.
The type of business is also key. Factors such as seasonality and weather are impactful, and having cash is critical with labor-intensive businesses. We often find in agriculture or manufacturing that short-term financing in the form of a line of credit or credit card is critical to help the business owner bridge the period between the cash outlay and the sales receipts.
Increasing cash flow
Q: What are some tips for increasing your cash flow?
A: One way small businesses can better manage cash flow is with AI-enabled solutions. They provide tools for small business owners to stay abreast of their cash position today and forecast it so they can take appropriate action.
The Strands Business Financial Management (BFM) platform, for example, contains a layer of AI and machine-learning models that can help manage accounts payables, receivables, budgets and provisions. It also delivers personalized notifications and highlights recommendations and solutions for a small business owner which will help mitigate these challenges.
Another way to increase cash flow is with a small business credit card that offers interest-free grace periods to support the short-term financing needs of many small businesses. Also, with transaction details of every purchase, credit cards can highlight opportunities to save, and many even come with innovative reporting options that illustrate spending trends to help business owners optimize their cash flow.
Ultimately, streamlining business processes is key to managing cash flow. Analyzing the current position of your business and processes in place will help you find efficiency gaps and areas where you might be able to invest in updated products or smarter solutions.
Q: What are the greatest challenges businesses face when trying to properly manage their cash flow?
A: Poor cash flow management is one of the top reasons small businesses fail, and many banking solutions don't address the unique requirements of small businesses. Our research found that small business owners globally cite cash flow projection as the most challenging aspect of cash flow management.
Many small business owners don't have a clear reporting mechanism that provides a complete view of their financial accounts and forecasts of their inflows and outflows. To help solve for this, small business owners are increasingly looking to integrated platforms powered by artificial intelligence and big data.
Having the right cash flow management system in place that is simple and easy to use is particularly important. Most small business owners aren't professionally trained in accounting and finance and would rather spend their time following their passion or concentrating on what got them into business in the first place. Expending energy trying to educate themselves on how to manage their cash flow takes precious time away from practicing their craft.
Q: What is the best piece of career advice you have ever been given?
A: When I first started managing people, I had a mentor who shared with me two important pieces of advice when it comes to leading teams. First, learn how to trust and empower your team. As a first-time manager, the thought of ceding control and needing to know every little detail was – and I believe still is – a major challenge. Trusting and empowering my team has allowed me to take on the role of the leader rather than the doer.
This ties well to my second thought, which is that diversity is critical, whether that's diversity of background, race, gender or thoughts. Openness to diversity provides much richer and broader perspectives and has helped me create and lead well-balanced and effective teams.