Understanding the Core Principles of Cash Flow
Managing cash flow is one of the most challenging aspects for growing businesses. As a company scales, its financial landscape changes rapidly, often creating a gap between paper profits and actual bank balances. Founders need to shift their focus from viewing cash flow as a back-office task to prioritizing it at the leadership level.
Four experts from the Civitas community share insights on how to keep your business running smoothly without running out of money.
Profit Is Not Cash
A common mistake among founders is confusing profit with cash. A company may appear financially healthy on its monthly management accounts but could be facing a liquidity crisis. Jonathan Fouché, director at Key Account Connections, emphasizes that profit and cash are not the same. He notes that many founders challenge profit figures when they don’t match their cash balance, highlighting the disconnect between what they perceive as cash and actual profits.
Linda Rossouw, fractional CFO at LaRoss Consulting, agrees, pointing out that a business can look successful on paper but still fail if customers pay late or if too much money is tied up in stock. She recommends using a rolling 13-week cash flow forecast to anticipate potential emergencies before they occur.
Mohamed Kajee, fractional CFO at Thrive, adds that tracking numbers means looking ahead rather than backward. He explains that while accountants often focus on profit and loss statements, which look at past performance, the cash flow statement is forward-looking and shows where the business is headed.
Everyone Has a Role in Cash Flow Management
Cash flow isn't just the responsibility of the finance team; it requires everyone in the business to take ownership. Kajee points out that operations and commercial teams make decisions that impact cash flow. While finance is the custodian, the entire business contributes to managing cash effectively.
Funding Working Capital and Navigating Debt
Rapid growth often strains cash flow because businesses must cover expenses like stock, payroll, and overheads before customer payments arrive. Stephane Streuders, director at Key Account Connections, notes that growth can create more pressure on cash than when a business isn't performing well.
When funding gaps arise, it's crucial to bridge them wisely. Short-term debt or invoice discounting can be effective, but only if the business model makes sense. Fouche advises against using long-term funding for short-term needs. He warns that if a company’s growth were to stop, it should still be able to pay off any facility from its current operations.
Kajee suggests evaluating debt based on risk and predictability. If a project has quantifiable variables, such as timing or success likelihood, debt financing may be a viable option. However, if the issue is structural within the business, debt shouldn't be used to solve it.
Handling Corporate Payment Terms and Pricing Pressures
Securing a major corporate client is a win, but it often comes with extended payment terms. Founders must manage this carefully to avoid financial strain. Streuders warns against building a company on a single client, suggesting that pricing should include some buffer to ensure the ability to service clients.
Outside-the-box negotiation can also help. Streuders recommends milestone billing instead of waiting until the end of a project to invoice. Fouche suggests accepting a slightly lower margin for faster payment, as the cost of funding a longer payment period can be high.
Debunking the Growth Myths
The belief that rising turnover solves all financial issues is a myth. Fouche highlights that revenue alone doesn’t guarantee success if profits and cash collection aren’t in place. Streuders urges entrepreneurs to know when to say no, emphasizing the importance of considering margins and actual cash in the bank.
While reckless growth is risky, hoarding stagnant cash is also not the solution. Kajee advises that surplus cash should work for the business, whether through bulk discounts, early payment incentives, or short-term investments.
Keep the Wheels Turning
Managing cash flow during high-growth phases requires balance. It involves maintaining tight margins, forecasting with foresight, and ensuring every department understands its financial impact. Growth is the goal, but cash is the fuel that gets you there. By treating liquidity as a strategic operational tool, founders can confidently scale their businesses without running out of runway.
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