How To Manage Your Business Cash Flow
Being your own boss and being in charge of your own business can give you great rewards, but it is very challenging and takes a lot of hard work.
Even if you have the greatest invention since sliced bread, your idea has to be secured by reasonable financial management, this is where managing your business' cash flow, among other things, comes to the fore.
Good cash flow management means you have enough money ready to not only cover your existing costs, but also back-up funds in case things go wrong or for when an exciting opportunity comes along that you don't want to miss out on. Cash flow is one of the things that many start-up businesses overlook.
Divide Your Time Wisely
If you are running your own business you'll usually be the CEO, the HR manager, the marketing manager, the R&D manager, and everyone else in between. Of course, you also need to be the financial manager, otherwise you won't need to be all these other managers, as you won't have a business to run anymore!
Once you have made business plans, your sales plans, your marketing plans, and any other plans (you can never have too many plans!), you need to make sure you are regularly checking these plans, and see if you are sticking to them. Updating these plans as your businesses progresses is also a must. Don't forget to chart your progress, this will keep you focused on the initial business goals, so you won't get distracted.
Seeking advice from a mentor, if you can, is also a great idea. You don't have to pay a fortune to management gurus, just find a friend, or a friend of a friend, who has been in your position before. They will usually be very proud of their business and thus will be happy to help you with all the experience and knowledge they have gained along their journey. This will help you develop your management skills, plus give you down to earth advice, and real life advice that you won't find in the textbooks.
What Is Cash Flow?
Cash flow is basically the money coming and and the money going out. Sometimes one will be bigger than the other, and proper cash flow management will make sure you are prepared for this and that you don't get into trouble when this happens.
If one week you have a lot of outflows of cash, and no inflows, good cash flow management will ensure you have enough cash on hand when you need it. If this hasn't happened yet, because each week your inflows and outflows have balanced out, don't get complacent, the day/week/month will come when you are caught short. This cycle is known as your business' operating cycle.
What Is The Business Operating Cycle?
If the time between funds coming in is short, then you have a short business operating cycle, this means that the cash reserves you need to keep on hand will be lower than if your business operating cycle was long. After a few months you should be able to predict when cash flows will come in and out and thus you will understand your business operating cycle better, meaning your business will run smoothly.
Business Operating Cycle
Below is an example of a common business operating cycle (a.ka. cash flow cycle).
Predict And Plan For Your Cash Flow
Preparing for upcoming payments, or for slow months will help you plan for the future, and ensure you have enough cash on hand to pay future bills. The recommended way to do this is to forecast your cash flow, usually every month for a year.
To predict this, use real figures or estimated figures (if your starting out) which you record form the 1st day you start business. After 12 months you should have a perfect idea as to what your cash budget should be for every month to come.
Cash Flow Tips
- Shorten your operating cycle
- Make a debt collection plan
- Monitor business expenses
- Control business expenditure
- Have accurate and quick invoicing
- Make it easy for customers to pay you
- Talk to your suppliers in advance about invoice terms
- Maximise the interest earnt on surplus cash - (Compare Business Bank Accounts Here)
How To Manage Your Cash Flow
One way to get an accurate representation of your business' cash flow is to forecast your monthly cash requirements then compare this forecast with the actual results at the end of the month. Then you can see how closely they match up, and adust the next forecast. Each time you do this your forecasts will get closer and closer to the real results, and your predictions will be more reliable.
Just because you are selling a lot of your product, or your business is booming, doesn't mean you're safe. Even if you are making a lot of profit, on the books, if you don't actually receive payment on your invoices because customers aren't paying on time or at all, you won't be able to afford to purchase more stock or pay wages, and your business may come to a stand still.
Follow these tips to help you manage your business cash flow:
Manage Your Cash Flow
As well as your monthly predictions, you shuld prepare longer term cash flow projections. Start off with quarterly and yearly projections. This way you can be aware of any problems that might arise in the future and be prepared before they happen.
Improve Your Receivables
The shorter the timeframe between you buying materials and turnin them into cash, the better your cash flow will be. Improve the speed in which you turn raw materials into products, thes products (inventory) into receivables (sales), and the sales into actual cash.
Manage Your Payables
Flip over to the payments you will be making to other people and examine what is flowing out of your cash balance. Just because your sales are increasing doesn't necessarily mean your expenses should increase at the same rate. If the expenses are growing faster than your increase in sales, i.e. the outflows are leaking faster than the inflows are pouring in, your bucket will be empty quick, and your cash on hand will drop dangerously.
Prepare For Shortfalls
If your predictions are accurate, shortfalls shouldn't be a surprise, so you should have time to prepare for it. Sometimes there are surprises though, so make sure you have options lined up incase you fall short and need cash to keep runnning. (Compare Options Here)
Overall Good Financial Management
In order to make all the predictions discussed above, you will need to keep accurate records. Keeping accurate records is also essential to your overall business. This makes sure you are always aware of how your business is performing, and will also help you identify where you can make improvements to the business' finances.
Having a good bookkeping system helps this. You can hire someone to do this for you (either in-house, use a freelancer or other business) or do it yourself. There are many electronic systems available, just ask for accounting software packages at your local computer or office store.
Whether doing your own bookkeeping or if you pay someone else to do it for you, you should still be aware of three main financial terms.
- Balance Sheet - A snapshot of your business' financial situation at any particular date.
- Bookkeeping - Recording all money coming in and going out of your business
- Profit & Loss Statement - An overall summary of your business' incomes and expenses over a set period.