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10 Cash Flow Truths, Part 2

Apr 18, 2024


Last week we talked about the first 5 cash flow tips you should know in your business.

This week we address 5 more:

  1. Inventory
  2. Growth
  3. Taxes
  4. Leverage
  5. Flexibility

 But first, our sponsor.


10 Cash Flow Truths, Part 2

 Last week we introduced 5 cash flow truths. This week we finish out the list.

To recap, last week we discussed:

  1. Profits aren’t cash
  2. Cash reserves are your lifeline
  3. Your bank balance doesn’t reflect your obligations
  4. Invoicing quickly increases your chance to get paid
  5. You don’t have to pay when you get the bill

Let’s dive right in.

Take inventory management seriously

When selling a product, you have to build it or buy it before you can sell it. In either case, you’re investing money for it to sit on the shelf until you sell it then hope you get paid.

Every dollar of inventory is a dollar of cash tied up, which hurts cash flow.

Treat your inventory like an investment. If held too long it can “go bad,” so you need to actively manage it for returns… the profits you’ll get.

It’s definitely a balance.

Understocking leads to running out of product and losing out on sales and customers.

Overstocking ties up cash and increases the likelihood of inventory going bad.

It’s not a set-it-and-forget-it thing. It’s an always-be-managing thing.

In managing inventory, consider:

  1. A just-in-time inventory system to reduce holding cost and waste.
  2. Using forecasting tools to predict demand and necessary stock.
  3. Regularly reviewing and adjusting inventory based on sales, trends, and market conditions.

Software like NetSuite can help you better manage your inventory.


Growth eats cash

When most people hear about a rapidly growing business, they think “awesome, I wish I had that.”

When I hear about a rapidly growing business, I think “I wonder how stressed they are about cash?”

I recently went through an exercise with a client of mine who was struggling with cash. He couldn’t figure out why his cash balances were so low consistently.

As we looked into how to grow, we had to figure out how to solve it and quickly.

There were 2 main problems:

  1. It took a long time for ordered inventory to get to the warehouse (185 days)
  2. He had to pay for that inventory upfront

By finding another supplier, we were able to take the Cash Conversion Cycle from 230 days to 45 days.

This took the shipping time from 185 days to 15 days. The bonus? The new supplier didn’t require payment until the product arrived.

When you stepped back, it decreased their cash outlay by 3.5 times, which meant they’d free up a ton of cash to scale more quickly.


A few ways to manage growth well:

  1. Get credit facilities before you need them; this will help fill the lulls in cash.
  2. Use scenario planning to test how various growth rates could impact your cash position. Being surprised gives you less options than if you planned ahead.
  3. Revisit your Cash Conversion Cycle and push back against assumptions on DIO, DSO, DPO.

Don’t get intoxicated with rapid growth. Embrace growth then slowing, which will allow you to pile up cash and prepare for the next growth phase.

We breathe in and out. This creates a natural rhythm. The same with wind… in and out. Life is filled with this pattern and I believe companies should be as well.

Don’t forget taxes

I’ve seen it more than once: tax time comes and the owner is panicked because he doesn’t have the cash.

Not planning for taxes is the same as not measuring your revenue or expenses… because the reality is tax is an expense to your business. And in most cases, one of the biggest over the history of your business, if not the biggest.

Treat taxes as a profit center. Every tax planning thing you can do to reduce your tax bill is an increase in profit.

But, don’t let tax run the business. Profits run the business. Tax is a secondary concern, but one that deserves attention at least a few times a year.

A few things you can do to manage your taxes:

  1. Find the RIGHT CPA for your business; don’t just go with a friend. Go with one who understands your business.
  2. Meet, at minimum, quarterly with your CPA to plan your taxes and tax payments.
  3. Before making big investments or changes, talk to your CPA about the tax implications. It should be a part of your calculation, but never the only calculation.

Use leverage, but sparingly

It seems like there are two ends of the spectrum: those who hate debt and those who love it.

I have strong opinions on both.

Love it: I think you’re often misunderstanding or calculating the risk associated with it. I see a ton who love it but then don’t understand the fundamental financials of their business. In some ways… ignorance is bliss.

Hate it: you’re leaving a lot on the table and actually creating MORE stress than if you just took out a little debt. Sure you can cash flow, but wondering if you can make next payroll doesn’t have to be a think if you just took out a little line of credit.

Each stereotype is a generalization, so don’t get mad at me and assume I hate you.

The reality is, as in most situations, is that the answer is somewhere in the middle.

When managing leverage, consider:

  1. Establishing clear criteria for when and how to use debt. Focus on using debt to fund growth, reinvestment, and new initiatives.
  2. Regularly review leverage ratios and cost of debt in conjunction with cash flow.
  3. Build more than one banking relationship and speak openly with them. This will allow you to better understand the landscape and have options when you need help. Better to negotiate with a relationship than without one.

Flexibility is your friend

In some way this is a close cousin to the last one: using leverage before you need it provides you flexibility that you can’t get without it. It’s why I tell people to get a line of credit or take out a loan before they need the cash.

Banks love to give you money when you don’t need it but seize up when you do. 🤣

But flexibility is so much more than just flexibility in debt and keeping cash reserves.


  1. An attitude/mentality of flexibility and adaptability in planning.
  2. Using more than one supplier so you’re not exposed to supply chain issues.
  3. Keeping cash reserves, which we talked about last week.
  4. Slightly overstaffing, or cross-training employees, so you’re not as exposed to employees being out or quitting.
  5. Allowing employees to be a part of strategic discussions and TRULY offer feedback (which will improve your plans).

While some of these aren’t cash-specific, they help set the culture of the business which ultimately increases profits and improves the cash position.

The planning also allows you to see into the future, which will improve your cash management and make you more resilient. Because resilience is the ultimate goal with boosting cash flows.



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