The Down-Low on Managing Your Small Business's Cash Flow
Effectively managing your cash flow is one of the fundamentals of keeping your small business thriving. Some business people claim that a healthy cash flow is even more important than your business's ability to deliver its goods or services! That may be placing a bit too much importance on your cash flow, but consider this - if you fail to satisfy a customer and lose that customer's business, you can always work harder to please the next customer. But if you fail to have enough cash to pay your vendors, creditors, or your employees, you're out of business!
Every business can expect shortfalls now and again, and that's why it's vital that you always anticipate losses and have a competent plan in place for meeting your business's cash needs.
Here are some tips for managing your business's cash flow:
1. Get familiar with your cash flow statement: Your cash flow statement takes into account both the inflows and outflows of the company's activities.
Profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat restricted, and only looks at income and expenses at a certain point in time. Cash flow, on the other hand, is more dynamic. It is concerned with the movement of money in and out of your business, but more importantly, the time at which the movement of the money takes place. If you use the accrual basis of accounting, it is vital to know how to convert your accrual profit to your cash flow profit.
2. Complete practical cash flow forecasts on a monthly basis: Once you understand the basics of the cash flow statement, conducting regular forecasting for your business's financial future is the best way to be consistently prepared.
The primary purpose of using a cash flow forecast is to predict your business's ability to take in more cash than it pays out. This will give some indication of your business's ability to create the resources necessary for expansion, or its ability to support you, the small business owner. The cash flow forecast can also predict your business's cash flow gaps - periods when cash outflows exceed cash inflows when combined with your cash reserves. You can take cash flow management steps to ensure that the gaps are closed, or at least narrowed, when they are predicted early. These steps might include decreasing your investment in accounts receivable or inventory, or looking to outside sources of cash, such as a short-term loan, to fill the cash flow gaps. Consider preparing your cash flow forecast with the help of one of today's most popular software tools, such as QuickBooks® or ProfitCentsTM.
3. Vary your credit terms by client and invoice immediately: This is a great way to adjust your inflows. You can modify the length of your credit terms by client to better regulate and control the flow of cash income. Additionally, the completion of the invoice is an important step in the cash flow process. Your lack of attention in this step can unintentionally lengthen the cash conversion period. Your invoice actually begins the cash collection process for your completed sales. Don't wait until the end of the month or even the end of the week to prepare invoices - this could add as many as 30 extra days to your cash inflows!
4. Use your business's cash flow forecast to create a household budget you can live by: Beneath all the fun of running a small business, most small business owners are essentially working to live. That means your business's actual earnings need to match up with the demands of your personal household budget. One way to improve your cash flow is to minimize your business's operating expenses and to make sure that you make the most efficient use of every dollar you spend.
5. Obtain alternative credit options: Any small business can be struck with an unforeseen need for cash at any time. Prepare your business in advance for this kind of unpredictable event by acquiring an affordable short-term credit option, such as a low-rate credit card, home equity line of credit, or bank loan. Keep in mind, most banks/investors will request certain financial statements, including a cash flow statement, and possibly a business plan, from you before they are willing to invest in your business. However, taking these prudent steps now will provide a valuable tool when the sudden need for cash arises!
6. Let Cybertary help manage your cash flow: Managing your cash flow allows you to narrow or completely close your cash flow gap. Examining your cash inflows and outflows, and looking at the different components that have a direct effect on your cash flow, allows you to answer these questions:
From cash flow forecasting to helping you answer the above questions, the Cybertary team is equipped to help your small business. Several members of our Cybertary team are Certified QuickBooks ProAdvisors, and we can customize the program to meet your business's specific needs.
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