How to manage your cash flow
Cash flow is probably the most important financial measure for a production company. A company can be profitable on paper but ultimately fail without cash. If you used a significant amount of cash to fund your business through its first few years, you need to carefully manage your company's cash to sustain success. Here's how.
Start with an investment or start-up loan
New companies generally need cash to start and invest in their operations before they can turn a profit or positive cash flow. When you're starting a company, make sure that you have cash to work with. Owners may choose to take little or no compensation at first, but will need money in the bank for other operational needs. Owners can use personal savings, lines of credit, or even personal term loans to get the cash they need.
Know your capital investment needs
Cash needs can vary greatly based on the business type. Service-based businesses generally need enough cash to pay the people performing the work for a few months as well as to invest in any software and computer equipment. Businesses requiring research and development, equipment, and/or inventory will require significantly more cash. By clearly understanding your company's early investment needs, you can appropriately plan your cash outflows and secure enough cash to start.
Set an operating budget
After understanding your large capital expenditures, create an operating budget to forecast when you'll need cash for your other investments. Figure that you'll need cash for a few months before you start booking jobs. Even if you're an owner of an established production company, you should continue to budget your operating costs and compare this budget to your projected cash earnings, especially when work slows down.
Measure your working capital
Working capital in its simplest form is cash + receivables – payables. It's also often measured as a ratio of current assets ÷ current liabilities, with a result of > 1 indicating positive working capital—i.e., you can cover your short-term debts while maintaining cash to work with. Production companies just looking at "profits" often overlook working capital, but you can use it to determine if you can pay your bills and operating costs for the coming months.
Keep cash in your company
One of the biggest mistakes that business owners can make is to take cash out of their companies too soon. Of course, business owners need to make money to stay in business—but keeping the money in your business longer is more likely to foster long-term success.
Smaller companies would be smart to maintain at least four to six months of operating costs in their working capital (which is basically available cash), so that they can weather market fluctuations or other major production disruptions (like a pandemic). Companies that had the cash to make it through the tough months of the 2020 shutdowns were able to quickly get back to shooting once the lockdowns had ended and attain even more success than they had previously.
If you're baffled by the concept of cash flow, make sure your accountant can help you understand it and develop a plan to manage your company's cash. When choosing an accountant, ask candidates about the tools they'd use to help your business preserve a healthy cash flow—as it can go a long way toward supporting your company's ongoing success.