It’s very important to learn how to manage cash flow in your business. If cash flow isn’t managed properly within your first year in business, you’re not likely to survive the second.
When managing cash flow in business, you should know three key elements of cash flow analysis. They are:
- Accounts receivable: What customers and clients owe you.
- Accounts payable: What you owe your suppliers.
- Shortfalls: You hope not to have these, but they do happen.
You should learn how to run all three effectively if you want your business to thrive. Here are some tips to help you row your cash flow boat to the profit line:
Find out what your breakeven point is.
Record your finances and study how much you’re making versus how much you’re investing. Strive for that point where your business becomes profitable.
When you reach that point, start to focus more on cash flow management.
After you reach breakeven and your business is profitable, you still need to manage your cash flow; your business is growing.
Sometimes in business, you will encounter cash shortfalls. Whether your business survives or not depends on how you manage these shortfalls. With extra cash in your bank account, it becomes easier to focus on cash flow management because there’s back up for shortfalls.
Use a cash flow worksheet.
The worksheet examines the change in each balance sheet account and uses the information to determine cash flow statement impacts.
Collect receivables ASAP.
Delegate the task of tracking receivables and contacting customers periodically to collect payment to a trustworthy, persistent member of your team.
Encourage customers to pay up faster.
Offer incentives such as early payment discounts to your customers and keep credit requirements strict. Create a written set of standards to determine who is eligible for credit. Enforce those standards rigidly. You don’t want every customer walking in the door approved for credit.
Try and get the best deal you can on payables. Some suppliers charge late fees, however, so make sure you pay them on time.
Use incentives to boost sales.
You can quickly boost sales by doing creative things like sponsoring a contest, hosting a customer appreciation event, offering referral incentives, or taking your employees on a publicity tour. Do things that would keep your brand fresh in your customers’ memory.
Get a trustworthy accountant.
Get a trustworthy accountant to monitor your cash flows. Get him to inform you when your cash flow reaches a certain value.
Save to the cloud.
Save cash flow spreadsheets on Dropbox or OneDrive so they’re easily accessible anywhere you are; and make sure you use professional accounting software. Also, make sure you keep your files secure, even if you have to roll your storage and your accounting software into a single web-based package.
By making sure your cash flow stays positive, you’re not only ensuring the survival of your business but you’re in the process of making it thrive. Project future cash flows based on history and sound financial data. It takes the guesswork out of it, and you’ll sleep better at night.
All the best in your business!