What do you think is the most important life blood of the business? Is it profit, sales development, or customer loyalty? While they are several important arteries of blood flow for a business to survive, they are not the center which keeps the business alive. You can have all of three and still go out of business should you not have the one thing all companies have to live; which is cash! It takes cash to pay your employees, turn the particular lights on, open the door, and maintain it open.
Having cash available when you need it is crucial but you also have to know how and when the cash flows in and out of the business. You just don’t “know” this stuff. There are skills involved to calculate, monitor, and manage cash.
How you can make cash flow work for you rather than towards you are summarized in the following 5 rules.
Know How to Measure It
First, understand the income or profit plus loss statement is not the same as income. These are valuable analytical tools yet only measure performance at a particular moment in time.
A cash flow statement, however, shows the movement of money in and out of your business over time. Consider this as a trend report. A balance sheet will be the one other tool that measures money but again, only at a particular instant. It is just like a snapshot while a cash flow analysis is like a movie.
Understand the Causes of Cash Flow Problems
Cash flow complications can occur in any number of business lifecycles. Most commonly they occur in investing or receiving. Makes sense, since income is cash coming in and cash going out.
If you want to grow, you have to invest in things like people, equipment, facilities, or even inventory and that takes money out of the business. On the other hand, your clients could be slow paying and your company are unable to create enough cash. A cash flow trend sheet can forewarn a person of these needs for cash. In case you are facing rapid growth, declining sales, or long collection cycles think about yourself prepared.
A cash flow evaluation can also show you cycles in your company. This can be a valuable forecast of company expenditures like marketing costs to back up a big sale. If the sale is a success then you will see cash come into the business and you can form a plan to use it for continued growth. Simply by tracking and trending the business income by month, it will make it easier for you to plan your business next year.
Create Strategies That Can Maximize Cash Flow
One key here is to minimize fixed costs. Call suppliers and see if you can obtain a discount. Find a way to handle spikes within your business without hiring additional individuals. Minimize your cash needs and conserve cash in the business.
Consider non-cash rigorous payment options. Have you ever tried bartering? Make sure you are using business credit cards that will award travel points to minimize cash expenditures on future business outings.
Establish clear payment terms plus expectations with your customers and have a formal receivable collection process in place. Consider discounts for prepayment or require a deposit for large purchases.
Prepare For the Worst
When you see the trend that is restricting a positive income, then you need to have tools at hand to fix the problem, fast. When developing an intend to infuse cash into the business, be sure you line up the sources for the appropriate use. For instance, short term cash problems can be handled with credit cards or a line of credit.
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Longer cash flow needs could be financed through long term secured loans or a capital loan.
Other ways to improve cash flow might be to improve inventory turn and carry a lower supply of inventory. Be sure you have no cash sitting around; deposit checks the same day you receive all of them. Avoid slow paying customers. Create slow pay customers pay their bill before placing another purchase. Pay your bills on the final date they are due. Consider renting instead of purchasing equipment.
Do a business plan and a cash flow forecast, by month, at the start of each year. Post your actual cash in/cash out accounts at the end of each month. Policy for growth. Ideally, every cash expenditure should generate cash in return. It could take a few months or years but a good return on investment is the purpose of any growth strategy. Make a complete analysis about how exactly much you have to spend to meet development opportunities and how long it will be before you will be able to pay it back; more importantly, how you are going to pay it back.
So in the end, your business complements the flow, cash flow that is. Whether it’s positive, survival will most likely continue. If it’s negative, your business will be terminal. Is actually only a matter of time.