If there’s one thing owners agree on, it’s this: Small businesses live and die by cash flow. Cash flow can help lift a business to new heights or keep it idling in neutral. That’s why business owners need to understand how cash flow impacts their businesses and how to manage it.
Financial expert Eddie Lamb says that to understand how cash flow affects your business plan, start with a basic framework:
- Initial cash
- Cash in
- Cash out
- Ending cash
Ideally you’re tracking these numbers weekly or monthly, which is the foundation of managing cash flow. This enables you to predict the state of your future finances. It makes creating a business plan and modifying it not only possible but more meaningful: What will my cash balance be six months from now?
Lamb stresses that effectively managing your cash flow isn’t mysterious. We combined tips from several sources, including Lamb and Intuit for the best list of steps to take:
- Start where you are. Have an accurate picture of what your cash flow situation is today.
- Deposit all checks /payments immediately after receiving them.
- Invoice your customers frequently, and shorten your payment terms to 15 days, if possible but no more than 30 days.
- Make it easy for your customers to pay you.
- Consider offering small discounts for good customers who routinely pay early.
- Collect all receivables within 60 days (easier said than done!).
- Make sure your cash receipts and checks are pre-numbered; they’re easier to manage.
- Increase your own payment cycles, meaning pay your own accounts as slowly as you can without incurring penalties.
- Streamline your process for managing your inventory. (Merchandise sitting on the shelves is cash you’re not able to use.)
- Know what you owe at all times. Always have this number at hand, and never let your payables get away from you!
Can you afford that extra inventory or the next wave of marketing? The answers are in your cash flow history and forecasting. While it may seem obvious, negative cash flow remains a top challenge for small business owners. Citing past Discover Small Business Watch surveys, writer Russell Heubsch says that the stark reality is that cash flow problems kill businesses. Research says that at least 50 percent of small business owners report cash flow problems.
This can indicate underlying problems that need to be fixed. If your business is spending more than it earns, you have negative cash flow and projected cash flow problems. Heubsch says that business owners often fail to really scrutinize their financial statements until the problems are too big to handle. You could be making a profit and still have negative cash flow because of the lag times between delivering products and collecting and posting payments.
Business owners need to focus on long-term solutions, which Heubsch says center around getting your products to customers more quickly. He reiterates: Ask them to pay in cash or by credit card; offer a discount for those who pay in less than 30 days. Stretch your own payments to the last day but don’t jeopardize your relationships with vendors. And don’t hesitate to enlist the help of your accountant or business coach to solve your cash flow issues and get on track.
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