So what do you think is the most important life blood of a 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 heart 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 keep it open.
Having cash accessible when you need it is crucial but you also have to understand how and when the cash flows in and out of your business. You just don’t “know” this stuff. There are skills involved to measure, monitor, and manage cash.
Ways to make cash flow work for you rather than against you are summarized in the following five rules.
Know How to Measure It
Very first, understand the income or profit plus loss statement is not the same as income. These are valuable analytical tools but only measure performance at a particular moment in time.
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A cash flow statement, on the other hand, 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 moment in time. It is just like a snapshot while the cash flow analysis is like a movie.
Know the Causes of Cash Flow Problems
Cash flow issues can occur in any number of business lifecycles. Most commonly they occur in spending or receiving. Makes sense, since cash flow is cash coming in and money 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. If you are facing rapid growth, declining product sales, or long collection cycles consider yourself prepared.
A cash flow evaluation can also show you cycles in your business. This can be a valuable forecast of business expenditures like marketing costs to aid a big sale. If the sale is really a success then you will see cash come into the business and you can form a plan to utilize it for continued growth. By tracking and trending the business cash flow by month, it will make it easier for you to plan your business next year.
Construct Strategies That Can Maximize Cash Flow
A single key here is to minimize fixed expenditures. Call suppliers and see if you can get a discount. Find a way to handle spikes in your business without hiring additional people. Minimize your cash needs and save cash in the business.
Consider non-cash extensive payment options. Have you ever tried bartering? Make sure you are using business credit cards that award travel points to minimize money expenditures on future business trips.
Establish clear payment terms and expectations with your customers and have the formal receivable collection process in position. Consider discounts for prepayment or even require a deposit for large buys.
Prepare For the Worst
When you see the trend that is restricting a positive income, then you need to have tools at hand to correct the problem, fast. When developing an intend to infuse cash into the business, make sure you line up the sources for the suitable use. For instance, short term cash issues can be handled with credit cards or perhaps a line of credit. 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. Make sure you have no cash sitting around; down payment checks the same day you receive all of them. Avoid slow paying customers. Create slow pay customers pay their particular bill before placing another purchase. Pay your bills on the last date they are due. Consider leasing 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 costs should generate cash in return. It might take a few months or years but a great 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 will probably pay it back.
So in the end, your business goes with the flow, cash flow that is. Whether it’s positive, survival will most likely continue. Whether it’s negative, your business will be terminal. Really only a matter of time.