14 BEST PRACTICES TO HELP THE BUSINESS OWNERS MANAGE THEIR CASH FLOW
While many business owners and entrepreneurs fully understand the importance of revenue and profit, they may need to understand why controlling cash flow is necessary. Understanding operating cash flow is essential for a business to run efficiently and to reduce outstanding debt. For example, a company with a high-profit margin can still have a low cash flow. This might lead to overspending and other financial problems.
- LEARN MORE ABOUT CASH FLOW AND ITS IMPACT.
Cash flow is a part of every business. Its inflow and outflow influence every decision you make. It sounds dramatic, but know that your business will shut down like a lamp without electricity if you run out of money. Cash flow will affect product prices, customer payments, employee and supplier compensation, and more. A solid understanding of this will help you build a healthy business.
- COMPARE REVENUE WITH CASH FLOW.
Cash flow is the money that goes into the business through sales and goes out to pay expenses. A lesson for new business owners is that more sales sometimes mean better cash flow statements; As revenue increases, costs also increase. As a result, growing businesses often run into cash shortages, even as sales grow. That’s when injecting more working capital can make a difference.
- MAKE WEEKLY CASH FORECAST.
Get in the habit of making weekly 13-week cash flow statement . You’ll have much better control over your cash flow and can prioritize activities that generate both inflows and outflows to ensure you don’t let your guard down from a cash flow perspective.
- KEEP UPDATING YOUR 13-WEEK FORECAST
We want to encourage business owners to create a 13-week cash flow statements forecast , especially those just starting. Then, every week, update the forecast based on what happened in the previous week and extend the forecast period by another week. This way, you can keep track of exactly what’s coming and going so you can be more proactive in dealing with any cash shortages.
- REDUCE VARIABLE COSTS.
Maintaining an adequate income is essential to survival, and increasing income is essential to growing your business. One way to reduce risk is to reduce variable costs to reduce cash outflow. For example, when labor is a major expense, consider cutting costs to avoid situations where layoffs are necessary. Instead, reduce contract labor and redistribute work to your permanent workforce.
- USE YOUR CASH FLOW FORECAST TO DETERMINE WHEN TO SEEK FINANCING
Cash flow is essential to funding and growing your business. By accurately managing cash inflows and outflows, business owners can forecast cash flows and determine the right time to seek financing. When funding is needed, finding innovation partners on responsible terms is important. This may not be any traditional bank or financial institution but a payment processor or counterparty.
- GENERATE RESIDUAL INCOME THROUGH DIVERSIFICATION
Cash flow can often leave you. With events now part of our business, we were forced to avoid the trap of paying for next week’s event with money from next month’s event. Fortunately, diversifying into residual income-generating products or services can help offset immediate setbacks when cash flow risks are pervasive.
- DEVELOP MULTIPLE SALES CHANNELS
Over-reliance on a single revenue stream or cash flow can ultimately become a major risk for a business, which, as seen with Covid, has a very uneven impact on the economy. Businesses with a diverse customer base and multiple sales channels have far more staying power than those that rely on a single large customer or channel.
- DEVELOP FORECASTS FOR MULTIPLE SCENARIOS
Knowing your number inside and out is key. Cash flow can be quite chaotic for the new businesses. The successful business owners might find it helpful to develop different financial projections for various situations. Regularly reviewing forecasts allows business owners to predict cash flow trends over time better, helping them optimize cash flow management.
- CREATE YOUR FORECASTING ENGINE
Consider creating a cash flow forecaster. Many expenses are recurring or represent a fixed percentage of income. Cash is the most important part of your business. Before you tie it to additional inventory or unnecessary debt payments, use a forecasting tool to predict your current cash flow to make the right decision and decide if you can authorize new capital purchases.
- STAY UP TO DATE WITH YOUR ACTUAL SPENDING AGAINST YOUR BUDGET
Stay current with company expenses and track them based on budget or forecast. I fully support spending more money and making more money within a certain level of risk tolerance. Always monitor the availability of your loan or line of credit, as it is a useful tool for growing your business. Growing it too fast may require you to build the kind of inventory to meet higher demand. It’s a cash flow trap that seems counterintuitive
- SYNCHRONIZE ACCOUNTS PAYABLE AND RECEIVABLE
Business owners need to understand what drives cash flow. This means accurately synchronizing the payables and receivables of your business. Suppose your business relies heavily on spending to make money (such as through online marketing). In that case, you need to ensure your customers have shorter “net” payments and understand that If they pay you faster, you can offer more products or services.
- BE AWARE OF INDUSTRY TRENDS TOWARD ACCOUNTS RECEIVABLE
The percentage of outstanding receivables on invoiced sales is important for keeping cash flow current. Knowing your consistent trend and comparing it to industry standards will tell you how efficiently you convert bills to cash. An uptrend in accounts receivable should immediately cause concern and investigation.
- KEEP TRACK OF YOUR HOT SALE DATES
In typical business cycles, growth costs money, which makes understanding the number of days of outstanding sales essential. DSO is a metric that calculates the days from when a customer is billed until their cash payment is collected. It is an indicator of when money will naturally flow into the business. Understanding this metric has put many entrepreneurs in a difficult position, hindering growth.