Erik was recently asked a question by Ski on LinkedIn. Ski is a personal friend and fellow business owner. The question was about cash flow and what it means to be successful in terms of cash. This was Erik’s response:
Revenue is essentially a vanity metric. A better picture of a company’s wealth is cash flow. Cash flow is the money that moves in and out of a company from sales and expenses. It’s actual cash in the bank.
One way we maximize cash flow is having tight payment terms. Many companies allow you to pay them in 15 or 30 days but our payment terms are Net7. Our preferred payment method is ACH or credit card. Payment by check is a last resort and if we extend that option payment is due within seven days. We also invoice before services are rendered so we are getting paid as we start the work, instead of paying for labor and other costs and then reimbursing ourselves weeks later. These two things alone have maximized our cash flow significantly.
Another way to maximize cash flow is by obtaining a line of credit before you actually need it. It’s a good way to borrow money with the ability to pay it off over time.