U.S. Chief Operation Officer atEsker, Steve Smith is responsible for all operations in North, South and Latin America.
All executives worth their salt want their organizations to have healthy cash flows. But what does a "healthy cash flow" really mean?
A positive cash flow simply means more cash flows into the till than out of it, which is essential for a company to sustain long-term growth. A consistently negative cash flow puts a company in serious jeopardy, even though many American companies in growth mode routinely burn through more money than they bring in. Regardless, you can’t sustain growth without cash; it will eventually catch up to you.
However, a healthy cash flow isn’t simply earning more than you spend, nor is it about sitting on a pile of cash. It's about ensuring your organization can react to new opportunities quickly and without breaking the bank — meaning it's key to your short- and long-term growth.
Healthy Vs. Unhealthy Growth (And What Cash Flow Has To Do With It)
Massive, perpetual growth isn’t always a positive thing, even if that’s what shareholders want. Many companies — especially younger ones — have the outward signs of growth but are in a dangerous place. They expand too quickly, build enormous campuses and hire hundreds of employees, all to impress their investors. Even if they can show revenue growth, they're losing money hand over fist. From my perspective, this behavior harkens back to the late 1990s and early 2000s, when tech companies lacking solid business plans operated as though money and expansion were unlimited. Remember what happened to them?
With negative cash flows, such organizations don't have the cash on hand to take advantage of a genuinely lucrative opportunity when it comes along. Taking on even more debt to do so puts the company in an even more perilous position. And if a competitor jumps on the opportunity first, investors may assume the company has poor leadership or has lost its agility. On top of all these woes, an unhealthy cash flow makes it difficult to weather unexpected challenges (a worldwide pandemic, for example) that can turn an organization’s operations up on end.
MORE FROMFORBES ADVISOR
Healthy growth requires the business to react quickly to changing conditions and new opportunities. Healthy cash flow allows a company to grab exciting new opportunities, meet unexpected challenges and take the risks necessary to achieve positive-sum growth. Without these abilities, sustained, healthy growth simply isn’t possible.
Of course, you can’t jump on every opportunity that comes along. There’s a good reason most organizations try to stay within carefully crafted budgets. However, an agile company needs the freedom to deviate from the budget without causing undue stress on its health, goals or people. If you’re unable to respond to an unexpected opportunity due to budget constraints — or because any cash investment requires showing an immediate return — you stagnate.
Why Healthy Cash Flow Can Do More Than Boost A Company’s Market Agility
An organization’s growth involves more than just the company’s own resources. Just as you need your customers to pay invoices on time (the accounts receivables side of cash flow), your suppliers and partners need confidence in your ability to pay them as well. Loss of that confidence will hamper growth.
A healthy cash flow helps you maintain positive financial relationships with both customers and suppliers. It builds loyalty, not to mention the ability to call in a favor from time to time. For example, who didn’t experience issues with customer payments or their supply chain during the pandemic? With a positive cash flow, you can be flexible when your customers need help while still ensuring cash to pay your suppliers on time.
Finally, a company can’t grow if its employees lack confidence in the solidity of the business and its ability and willingness to take care of them, train them and provide the best benefits possible — even when times are tough.
Again, that’s where a healthy cash flow comes in. Without it, an organization can’t always hold that line. We must be prudent about what and where we spend on our employees, but you must show your teams that you value them and know the company can't run without them. When you do, the result is greater employee engagement, productivity and job satisfaction — and yes, significantly more potential for growing the business.
Five Keys To Sustained Company Growth And Where Cash Flow Fits Into It All
Here are a few tips for helping ensure your organization sustains growth and why a healthy cash flow is the most crucial element of all.
1. Invest in your employees. Do whatever you can to keep the great employees you have because you can’t grow without them. Even if doing so requires spending a little bit more, it’s less expensive than having to find, hire and train new staff.
2. Invest in solid financial relationships with your suppliers. Without a reliable and loyal supply chain, you can’t deliver to your existing customers, much less expand into exciting new markets.
3. Invest in the right technology at the right time. There are plenty of technologies to automate or simplify processes, make operations more efficient and focus your employees on higher-value business goals. Just don’t wait until there’s a crisis to invest. (Automation, collaboration and remote-work infrastructure saved many a company during the pandemic.)
4. Invest in new opportunities when they present themselves. You can never predict when the next big thing will turn up. When the opportunity for unexpected growth comes along, don’t be afraid to go for it.
5. Most importantly, work toward a healthy, positive cash flow. Maintaining a positive cash flow provides the freedom and flexibility to adapt to changing market conditions without relying on new loans from banks and other investors.
Of course, you’ve always got to invest your cash wisely, but do it so that it’s always working toward revenue growth. Once revenue is heading in the right direction, you should be able to achieve a positive cash flow, which can then kickstart a cycle of sustained company growth.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
