Painless Approach to Understanding Cash Flow
Cash flow. It’s a word business owners hear all the time and we all know the word can’t be ignored. Managing cash flow is important, and a healthy cash flow ensures your business has money for growth and paying expenses.
The key to running your business is to have more cash today than you did yesterday. If that’s not the case, then we need to get more cash flowing from your business.
As your company grows, it can be challenging to know how much cash you will need and when you will need it.
All business decisions depend on a cash flow projection.
To plan ahead you need to depend on previous cash flow patterns. These patterns will give you a complete look at how and when you receive and spend your cash. This info is the key to unlock informed, accurate cash flow projections.
How to measure cash flow
Being able to accurately measure cash flow will make you aware of any trouble ahead and plan accordingly. The cash flow plan will need to be closely monitored as some clients may cancel or change their membership, vendor payment terms may change, or you may have additional loan payments to make.
Manage your payables
Take advantage of vendor payment terms. Just because you get a bill doesn’t mean you have to pay it that day. Look at the bill, they may have Net 30, Net 45, Net 60 days. Think of that time as an interest-free line of credit available to you to use on other things as well as time for incoming payments to be received. Some vendors will offer substantial discounts if you pay earlier. Evaluate if those discounts are worth it.
Surviving lean times
The key to managing the lean times comes down to identifying problems as soon as possible and having accurate and up-to-date financial statements. Take steps to actively prevent cash flow shortages. Analyze your bills, and carefully paying vendors and employees will help you keep cash in your bank. It’s important to stay in contact with your vendors to talk about payment plans.
- Know how many months/weeks your business can survive before tapping into reserves.
- Determine how much money needs to come in on daily/weekly basis to stay afloat.
- Have some information about how to analyze bills to pay.
- How can you still pay yourself something during lean times?
- What expenses can you get help with or pushing off payment?
The lag time between when you pay your suppliers and employees and when you collect from clients is the cash flow problem, and creating a cash flow plan is the solution.
Delaying payment of expenses as long as possible while encouraging anyone who owes you to pay as soon as possible will make your cash flow again!