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Maximum Time: 60 Minutes

1. The Difference between Profit and Cash Flow

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You have learned that business success requires daily record keeping. Every time your business receives or makes a payment, you need to record it. You have also learned how to create an income statement, which shows a summary of the profit (or loss) achieved by your business over a specific period of time. Profit is defined as the money left over for your business after you subtract your expenses from your revenue.

While profit is an important metric, it’s not the only one that demands your attention as a business owner. Cash flow is a metric that focuses on the timing of the movement of money in and out of your business every day. Cash flow is the lifeblood of your business. When your business has cash available, you can pursue options for growth, make investments, and save money for unexpected situations or emergencies.

Your income statement might show that your business is profitable, but it will go bankrupt if it doesn’t have enough cash to pay its obligations. Cash flow problems are one of the leading causes of business failure.

Activity (10 minutes)

Work together as a group to complete this activity. Choose two group members to join the facilitator.

Facilitator: Today we’re going to talk about cash flow. Cash flow refers to the timing and amount of the cash flowing in and out of your business. It can get complicated. We’re going to look at two businesses and how they manage their cash flow. As you learn about each business, underline the key points that you think will affect their cash flow.

Business 1 Owner: My business is growing fast, with a lot of sales. We pay our suppliers quickly so that we establish a good relationship. Our customers pay us eventually, so their outstanding invoices are like money in the bank.

Business 2 Owner: My business is growing at a modest pace. Our sales fluctuate; there are down times and good times. We strive to pay our suppliers within three or four weeks after we receive their invoices. We also track our outstanding invoices carefully and work to have our customers pay us on time.

Facilitator: Now let’s present challenges to both businesses and discuss as a group how we would expect each one to perform. (Note: Finish reading and discussing Challenge A before reading and discussing Challenge B.)

Challenge A: Due to increased sales, the business must double its staff during the next four months. Which one will be better at meeting this need from a cash flow perspective? Why?

Challenge B: The business has an unexpected opportunity to expand into a promising market. Which one will be better at meeting this need from a cash flow perspective? Why?

• Which of these businesses would have stronger relationships with its suppliers?

• Are “outstanding invoices” the same as “money in the bank”?

• Which of these businesses would have greater long-term success? Why?

2. Understanding Cash Flow

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There are two types of cash flow:

Positive cash flow occurs when the total amount of cash coming into your business during a specific period of time is greater than the total amount of cash leaving your business during that same time. This is what you want: a positive cash flow cycle.

Negative cash flow occurs when the total amount of cash leaving your business during a specific period of time is greater than the amount of cash coming into your business during that same time. This is a risky, undesirable situation that you should address immediately with actions that generate cash as quickly as possible and reduce costs.

Let’s review three different examples to understand cash flow pressures and how a business owner might address them. Imagine that a business starts the month with 300 in cash. The business usually receives cash payments of 200 every Monday and 200 every Wednesday. It pays out 300 in cash every Friday. Example A below shows the cash flow cycle for this business over a period of three weeks. Money comes into and flows out of the business in a predictable pattern.

Example A: Ideal cash flow

Ideal Cash Flow

Unfortunately, every business experiences surprises and setbacks. Example B below shows what happens when a business isn’t prepared for a negative cash flow. In this case, two customers don’t pay their bills, resulting in 400 of uncollected receivables (also called bad debt). The business owner was depending on this money to pay employees. The business also incurs an emergency expense that has to be paid immediately.

Example B: Negative cash flow—unprepared

Negative Cash Flow: Unprepared

Example C below shows the same surprises and setbacks as example B. But in this case, the business owner is prepared. She relies on her line of credit to keep her business operating. She repays the balance on her line of credit as soon as possible.

Example C: Potential negative cash flow—prepared

Potential Negative Cash Flow

Discuss:

What do these examples teach you about the challenges of managing cash flow?

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It’s common for business owners to have cash flow challenges. Some of these challenges include:

• The newness of the business, which makes it difficult to receive and pay on credit.

• Growth opportunities, which can reduce the amount of available cash.

• Having inventory, which ties up cash.

• Customers paying on credit, which delays the amount of incoming cash.

• Selling to other businesses that pay on credit, which delays the amount of incoming cash.

• Uneven sales due to seasonality or other factors, which can create peaks and valleys in the amount of cash you have.

• Unexpected expenses.

• Nonpayment by customers (bad debt).

Discuss:

What potential challenges do you anticipate with the cash flow of your business?

3. Strategies for Improving Cash Flow

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There are many things you can do to create a positive cash flow cycle for your business and to prepare for possible surprises and setbacks. For example, you could research the standard payment terms for your industry. In some industries, vendors can wait 90 days or longer before they are required to issue payment. Other industries often require payment within 30 days. When you understand the standard payment terms for your industry, you can then work to negotiate more favorable terms for your own business.

Activity (15 minutes)

Step 1: As a group, review the following strategies for improving the cash flow of your business. Pause after each section to identify the pros and cons of these strategies.

Get Paid Quickly

• Offer discounts to customers who pay early.

• Consider implementing a late-payment charge.

• Either don’t offer payment on credit, or establish strict terms for payment on credit.

• Accept credit card payments.

• Issue invoices promptly.

• Create an accounts receivable (A/R) follow-up plan.

• Offer automatic bill payments to customers.

Conserve Cash

• Pursue a business opportunity with few fixed costs.

• Cut unnecessary expenses.

• Manage and control inventory.

• Wait to pay invoices until a few days before they’re due.

• Negotiate delayed payment terms with suppliers if necessary.

Manage the Flow

• Maintain a cash reserve.

• Obtain a loan or line of credit to address periods of uneven cash flow.

Step 2: Individually write down answers to the following questions:

What actions could you take to speed up the flow of cash coming in to your business?

What actions could you take to slow down the flow of cash leaving your business?

Discuss:

Business owners generally want to receive or collect cash as quickly as possible and withhold paying cash until they are required to do so. On the surface, this principle may seem to conflict with the Savior’s teaching that “whatsoever ye would that men should do to you, do ye even so to them” (Matthew 7:12). As a business owner, how do you reconcile these principles?

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As you work to create a positive cash flow cycle for your business, it’s important to operate with integrity. Put in the effort to understand the payment terms for your industry. Be smart in setting up your payment strategy. Work to create favorable payment terms for your business. Once you have set your payment strategy, clearly communicate your expectations and keep all of your commitments.

4. Actively Managing My Cash Flow

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It’s not enough to periodically check your business bank account and hope that the numbers work out. You need to actively manage the cash flow of your business.

As a successful business owner, you should know how much cash your business has available at any time. Don’t rely on bank statements to manage your cash flow. Your account balance often doesn’t reflect payments that are in process, such as payments going out to suppliers or coming in from customers.

You need to create and continually update your cash flow projections. As explained earlier, cash flow is the timing and amount of cash that flows in and out of your business during a specific period of time. Your projection should show your expected cash flow for the next few months. Your projection won’t be 100 percent accurate, but it’s essential that you consistently establish conservative estimates for your monthly revenue, variable expenses, and fixed expenses.

Positive cash flow doesn’t just happen for a business. It’s achieved through hard work and careful planning. If you know your current cash position and future cash flow projection, you can make decisions that will help your business succeed and grow. Successful business owners keep a cash reserve for unexpected expenses and often line up sources of credit based on their projected cash flow needs.

Activity (15 minutes)

As a group, read aloud each situation below. Discuss the questions for the first situation before reading the next one.

Situation A: Imagine you have started a business that sells children’s Halloween costumes online. In June you buy 300 costumes from your manufacturers. You purchase various sizes of the costumes that you think will be best sellers. This purchase consumes nearly all of your business cash. Your sales start slowly in July and August, but they begin to pick up in September. You notice that two costumes sell out immediately, and you continue to receive customer requests for them. Meanwhile, your inventory has a lot of other costumes that are not selling well. You want to purchase more of the two most popular costumes, but by the time you’ve earned enough cash to make the purchase, you realize that the costumes won’t arrive in time to sell before Halloween.

• What factors contributed to your cash flow challenges in this situation?

• What could you do differently next year to improve your cash flow and the overall success of your business?

Situation B: Imagine you own a landscaping company. You frequently design and install new sprinkler systems. You have recently hired two new employees, which means you can now operate two installation crews. Your cash flow is tight, but you feel optimistic about the amount of new business you’ll be able to add this season with a second crew.

After finishing some jobs, you have multiple customers who don’t pay you on time. One customer has run into financial problems and is asking for additional time to pay you. The other customer is unhappy with his newly installed system. He wants you to do a lot more work, and he says that he won’t pay you until he is fully satisfied. You are now concerned about your ability to pay your employees over the next few weeks.

• What factors contributed to your cash flow challenges in this situation?

• What could you do differently to grow this business while maintaining a positive cash flow cycle?