Business is a ground that moves with continuous earning and spending. We call the money that comes in and goes out of a company as cash flow. It is the generation of income and the payment of expenses. Cash inflows result from either the generation of revenue through the selling of goods and services, money borrowed, or money earned through investments. Reasons for Cash outflow are all kind of expenditures, waste, damages; so on.
Trying to run a business without managing cash flow is like trying to paddle a boat without an oar. Even if you succeed, it will be an upstream exercise guaranteed to wear you out.
Cash flow is important for all businesses, but it is critical for early startups. If you cannot manage your cash flow within the first year, you will likely not survive the second year.
The three key elements of your cash flow analysis include:
01) Accounts receivable : What customers and clients owe towards you
02) Accounts payable : What you owe towards your suppliers
03) Shortfalls : You hope not to have these, but they do happen
You must effectively manage all above three if you want to navigate your business to success. Of course, the best direction to paddle a canoe is with the current. You’ll go faster and won’t wear yourself out. By the same token, your business will be healthier if you manage your cash flow toward the profit line. Here are a few tips to help you row your cash flow boat successfully.
01. Monitor your Cash Flow regularly
Monitoring the cash flow statements monthly or even weekly will keep your eye on the pulse of your business. These critical numbers tell you just how much is coming in and how much is going out of your business. Making more than you’re spending? It’s all good. Cash flow regularly edging into the red? Not so good.
Online accounting software such as QuickBooks Online, Xero, Multiview and other existing, makes it simple to reconcile your accounts, generate reports and more. Because your information is secure in the cloud, you can easily stay on top of your cash flow wherever you are.
02. Determine your Break-even Point
You should know when your business will become profitable, not because it will affect your cash flow, because it won’t. But it gives you an early goal to strive for and a ready-made target for projecting future cash flow. Negative cash flow and negative profits make for a grim combination. Focus your efforts on managing your cash flow with an eye toward reaching that moment when you realize your first profits.
03. Focus on Cash Flow Management, not Profits
This may sound contradictory to the above fact, but it’s not. Use your break-even point as a benchmark. After you reach break-even and your business is profitable, you still need to manage your cash flow, to maintain the positive figures for upcoming years.
04. Maintain some Cash Reserves
You will have cash shortfalls. Your business’s survival may depend on how you maneuver through those shortfalls. If you start with some cash in your bank account, it will be easier to focus on cash flow and you won’t stress about the shortfalls. By this you may stay away from cash borrowing at many times.
05. Stay on top of invoicing
Send invoices when the work is completed or products are delivered. Find out the specific person, job title and address to send your invoices to, so they don’t get lost in a shuffle from department to department. Design your invoices in a straightforward and easy manner to read, with key areas like due date, amount due, where to send payment and payment methods highlighted. Speed things up further by emailing invoices instead of mailing them.
06. Encourage customers to pay up faster
Offer your customers early payment discounts and keep credit requirements strict. Establish a written set of standards for determining who is eligible for credit. Enforce those standards rigidly. You don’t want every customer walking in the door approved for credit.
07. Delay payments to your vendors
Unless there’s a worthwhile incentive for you to pay early, figure out how late you can pay your vendors without risking late fees or harming your relationship. This keeps the cash in your account and out of your vendor’s until it absolutely has to be there.
Staying on top of your cash flow is key to your business success. Don’t let a few cash flow missteps put you in a money crunch. All it takes are a few smart moves to keep your company in the black.