Cash flow management is simply a process of tracking the amount of money coming in and the amount of money going out. It helps you determine the amount of money that will be available for your business in the future. No business can survive without proper cash flow management. It is an essential part of financial analysis and an integral part of any business.
SummaryCalculate break-even point.Consider cash flow before profit.Try to have cash reserves.Focus on collecting debts as soon as possible.Extend debts as soon as possible.Watch your cash flow carefully.Enforce the technology to managing your cash. Projecting future cash flows.Cash flow management is especially important for startups. If the business is unable to manage its cash flow in the first year of operation, it will likely not survive the second year. Poor cash management can lead to a company's inability to pay suppliers or fund urgent needs. Undoubtedly, you can use a line of credit.
However, when your loans and credit cards are empty, you will find yourself in a situation where cash is needed.
In order to perform a cash flow analysis, you will need to take three key things into consideration and they are as follows:
You must be able to manage all of the above in order to lead your business to success. It is not advisable to allow a situation where your customers owe you too much or when you owe your suppliers too much. Otherwise, it can significantly harm your business.
In order to determine the current cash flow, you will need to look at the amount of money coming in and the amount of money going out. If you have a number of customers who owe you money and haven't paid yet, make sure you don't count this as part of your cash flow.
Without a doubt, cash flow management is vital for businesses. However, if there is no cash to manage in the first place, the business is in trouble. There are, however, several ways to increase your cash flow and eliminate any difficulty.
Here are the most important cash management tips you can use for your business:
It is extremely important to determine the break-even point of your business. This way you will know when your business becomes profitable and also gives you an early goal to achieve.
When managing cash flow, focus on hitting that break-even point. This type of analysis can be done in two ways:per unit or per dollar. Both approaches involve fixed costs.
In order to calculate the BEP with the use of a unit-based approach, you will need to take your fixed cost. The next step would be to take your revenue per item and subtract it from the variable cost per item.
The last step is to take the fixed cost and divide it by this number. BEP, with the use of a dollar-based approach, involves taking a fixed cost and dividing it by the contribution margin.
It may seem contradictory, but it is a reality. Even if you break even and your business is profitable, you still have to deal with cash flow management.
The next step after reaching the BEP is to do an analysis of accounts payable, accounts receivable and deficiencies. Then, determine if any of them present a problem for your business.
It could also be that your business manages to break even, but has run out of cash. If this is the case for you, it's time to take a detailed look at the aforementioned items.
This will help you determine if you need to attract new customers or if it would be wise to cut expenses. Even the smallest change can have a big impact on profit margin and give you an idea of what has the biggest impact on your business.
Every business has shortcomings and yours is not an exclusion. The survival of your business depends heavily on the ability to manage these deficits. If you are already starting your business with cash in your bank account, it will make your life easier.
It would be great to have cash reserves that will help you last the first three to six months. This way, you will be able to protect your business from situations where a market dips into a temporary downturn.
Customers appreciate situations where the invoice says “due in 30 days”. While it's good for customers, it's not good for your business. It is recommended that you indicate "due upon receipt" on your invoice.
You can also delegate the task of keeping tabs on receivables to your employees. He will be responsible for contacting your customers and collecting payments.
The Accounts Payable approach should be the opposite of Accounts Receivable. It is advisable to extend payable to net 60 or net 90 if possible. This will give you a chance to have a higher cash balance and increase your debt.
Another reason for having cash reserves is your ability to pay suppliers. If you owe suppliers and don't have enough cash to make payments, you will hurt the relationship with them. They may also impose additional fees. Other than that, they can pause the next shipment, which will halt the entire production process.
Make sure you have a professional team in the finance department. These people should be fully informed of all company finances. It is also important to have someone who will be responsible for monitoring the cash flow and notifying you when the business reaches a certain threshold. For example, when your cash flow hits the $1,000 mark.
Experts recommend keeping your cash flow spreadsheets in the cloud. Some of these sites are DropBox and OneDrive.
By using these services, you will be able to access them from anywhere. You can also use professional accounting software. An important detail to mention is security.
So, when using cloud-based technology, make sure you have the best security practices in place to protect the data. Security should be the number one priority for your business.
See also:How cloud technology can help your business grow
Estimating future cash flows is an important part of cash flow management. This is normally done using historical data and market movements. Be sure to project for each month, quarter and year. Accurate cash flow projections can alert you to problems before they arise.
Undoubtedly, it is almost impossible to make the predictions that match the actual numbers when the time comes. However, it is possible to make a prediction that will be close to the real numbers.
Cash flow projections will give you an idea of what to expect in the future. In this way, you can prepare your business for all the difficulties that will arise along the way.
