Cash is oxygen to your business. It keeps the lights on and pays your suppliers and your people. 

Cash is also your safety net when times get tough and money gets tight. Maximizing your cash flow (and holding on to that money) builds wealth and minimizes risk. 

The richest people in the world have made the bulk of their money investing when few others have the cash to buy. You want to be one of the few and that requires a disciplined way of living and running your business.

Maximizing your net income and using that money to pay down debt puts you in a great position to invest and to help others. We must put our oxygen masks on first before we can be the greatest help to others.

I want to walk you through the five forces of cash flow for entrepreneurs and how you can leverage each to maximize the amount of cash you have in the bank.

Net Income: I can’t emphasize this enough. Net income is the biggest driver of cash flow you have, so maximize it every chance you get. Focus on growing your gross profit while maximizing your labor efficiencies. Find industry peers that you do not compete against and learn from each other.

Working Capital: Working Capital is calculated by subtracting your current liabilities from your current assets. Managing your accounts receivable is the quickest way to create additional working capital. Bill earlier and make follow-up calls. 

A lot of customers are willing to pay as soon as they receive your invoice, and many will respond favorably to a phone call. The phone call can serve two purposes. It can be a customer service call and a “did you receive our invoice?” call.

Monitor and manage your Days Sales Outstanding every month. Days Sales Outstanding is calculated by taking your Accounts Receivable balance divided by your non-cash Sales times the number of days in the month. 

If you made $1 million in non-cash sales in a 30-day month and had $1.5 million in accounts receivable your Days Sales Outstanding would be 45. How does that compare to the terms you set for your customers? Can you improve it?

In this scenario, improving your DSO by one day will net you $33,000 cash in your bank account. Dropping it by 10 days creates $333,000. Create a focus on DSO and bring your number down.

Capital Purchases: Every business needs to make capital purchases. We get into trouble when we buy things that don’t have a real return on investment for your business. These purchases pull cash out of the business or take you further into debt.

Hold yourself and everyone in your organization accountable to only making purchases that deliver a great return to your business.

Distributions: In small business we can become dependent on distributions to fund our lifestyles. To win at the game of business you must have an accurate scorecard. You cannot have an accurate scorecard unless you are paying all owners a market-based wage. If you are paying all owners a market-based wage, your net income numbers will be real, and you’ll be a lot less nervous when the IRS comes calling.

All owners should be able to sustain their lifestyles off their market-based wages. Distributions should only be made after the business has all the capital it needs. I learned from Greg Crabtree that “we need to be paid for what we do and earn on what we own.” That is the only way to build a great business.

Taxes: A big difference between what you made and what you keep is the amount of taxes you paid. Your tax bill should not be a surprise and you should be saving for your taxes out of your monthly profits.

This is hard to take, but the single greatest indicator of your business success is paying more in taxes. Focus on increasing your net income and let your tax professionals help you pay as little as legally possible in taxes. Never let the tax tail wag the dog. As the leader, your job is to maximize long-term, sustainable net income.

Is your business generating all the cash it can? If not, you are facing more risk than you should and not creating the wealth you can.