Just as having a healthy lifestyle and regular physical checkups can help you prevent and detect health problems - such as heart disease - early, paying close attention to cash flow – your business’s life blood – can help you keep your business free of financial problems.
Here are some best practices in managing cash flow:
Monitor your cash flow closely. Pay close and regular attention to all the metrics mentioned earlier, in “Metrics to Measure.” All of these measurements should be things that you and/or your chief financial officer have access to fairly quickly and easily.
Make projections frequently. By closely monitoring key cash flow data or variables, you’ll be able to make better, more accurate, more up-to-date projections of future cash flow and you’ll be more likely to keep your business out of trouble financially.
Prepare a thorough, accurate cash flow forecast. When forecasting sales and expenses for a given period, keep in mind historical figures, such as customer payment histories, industry norm, averages and trends, plus current economic and business conditions. Project monthly cash inflows and outflows during the period. As you go through the budget period, compare and update your budget based on actual monthly performance.
Include your net cash position, which is:
Your cash on hand at the start of the period + estimated cash inflows – estimated cash outflows = net cash balance.
Identify issues early. Obviously, the sooner you identify a problem, the better, and the easier it could be to fix it. For one thing, if you need to approach your bank to request some lenience or flexibility, they’ll likely be more receptive to helping if you ask them far in advance.
Understand basic accounting. By knowing the key concepts of basic business accounting, you’ll be able to read and understand financial statements, and you’ll be more capable of monitoring the financial health of your business and making sure you stay cash flow positive.
Have an emergency backup plan. Who knows what might happen that could result in a worst-case scenario in which you are close to a cash flow crisis. A clear, well thought out back-up plan can provide you with peace of mind and a source of reserve cash in case you need it one day.
Grow carefully. Growing your business too quickly can be highly risky. As you ramp up to sell more, you first need to spend more, buy more raw materials or hire more staff. If the amount of time between your increased cash outlay and increased sales is too long, you could find your business starving for cash. So, take precautions when growing your business and identify financial risks and have a business growth plan in place that avoids long delays between cash outflow and inflow, and that pays very close attention to managing cash flow.
Invoice quickly. Any delays in invoicing your clients will only add to your wait to receive payment for your work. Small businesses should invoice clients as soon as the work has been completed.
Use technology wisely and effectively. Tools exist that can help you manage your cash flow quite easily and productively. These include software dedicated to small businesses, such as QuickBooks as well as cloud (Web-based) accounting services.