Anyone who has ventured into the great adventure of entrepreneurship can testify that funds can be incredibly tight, especially at the beginning stages of your business. Regardless of whether you have solid angel investors supporting you or are just bootstrapping it, you need to ensure that the management of your company’s finances are without equal.
If you have not trained yourself to carefully scrutinize expenses and have not prepared for unexpected costs, be sure that your company will not survive.
What Is Cash Flow Management?
When you hear about cash flow management, what comes to mind? It’s essentially about taking the necessary steps to ensure you have enough cash to pay for all of your “outgoing expenses”. You never want to have your outgoing expenses to exceed your sales. This will directly translate into running out of cash to pay your suppliers and your staff. In other words, insolvency.
Even if your business is profitable, effective cash flow management demands efficient forecasting for long-term planning. It is also critical to prepare for any possible financial difficulties like a seasonal decline in sales, a substantial order coming up or the immediate need for new equipment.
It is also necessary to create a backup plan to guard cash flow for unexpected financial stress. This stress could include suppliers or customers closing their business, equipment failure, or the delayed payment of invoices.
How To Improve Your Cash Flow
Luckily, there are many ways to improve your current cash flow. At the very basic level, effective cash flow management is about being extremely familiar with your company’s income and expenses. It is also about determining potential risks, and to have the necessary plans and strategies in place to confront these challenges.
Here are five ways you can manage your cash flow to increase your revenue:
- Keep your books current and exact. Your cash flow mostly depends on how you report and carry out your accounting. Ensure that all accounting information is revised frequently. This will give you an accurate picture on the state of your business.
- Be direct with your customers. You can be straightforward and fair when it comes to pursuing late payments from your customers. A good invoice strategy can help your cash flow tremendously. If required, do take formal action. Stay vigilant of your “accounts receivable turnover”. As they begin to increase, intensify your efforts to chase down the payment.
- Keep it simple. Your accounting that is. If accounting and spreadsheets are not your thing, hire a reputable and professional accountant. Utilizing a first-rate accounting software is essential so you always know where you stand financially. It will also help you “forecast your cash flow”.
- Your business and personal finances should remain separate. By mixing the two, you will never get an accurate picture of where your business financially stands or how it’s performing. By keeping them separate, you will know how much your company is bringing in, you will be able pay yourself and use the extra cash to grow your business.
- Establish a cash reserve. By building a cash reserve, you are building a sort of insurance fund to cover your business in the event of an emergency. It also gives you the certainty to grow your business.
Managing Your Cash Flow Is Essential
Learning to manage your cash flow is about ensuring that you continuously pump life into your business by having adequate cash. Running a business can be incredibly volatile and it’s only a matter of time until an unexpected event rattles your company. Be prepared by having cash reserves on hand and being ready for the next wave of challenges.