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 to your business in the future. There is no business that can survive without proper cash flow management. It is an essential part of financial analysis and is an integral part of any business.
Cash flow management is especially important for startups. If the company is not able to manage its cash flow during the first year of operations, it will probably not survive during the second year. Poor management of cash flow can result in a company’s inability to pay its suppliers or finance urgent needs. Without any doubt, you can make use of a credit line.
However, when your loans and credit cards are empty, you will be left in a situation where the cash is needed.
In order to perform cash flow analysis, you will have to take three key elements into consideration and they are as follows:
- Accounts receivable – This is the amount of money customers owe you.
- Accounts payable – This is the amount of money you owe to suppliers.
- Shortfalls – This refers to the situation where you owe more than what you have on liability.
You have to be able to manage all the aforementioned elements 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 hurt your business significantly.
In order to determine the current cash flow, you will have to look at the amount of money coming in and the amount of money going out. In case you have a number of customers that owe you money and have yet to pay, make sure not to consider this as part of your cash flow.
Undoubtedly, cash flow management is vital for business. However, if there is no cash to be managed in the first place, the business is in trouble. There are, however, a number of ways to increase your cash flow and eliminate any difficulties with it.
Here are the most important cash flow management tips you can use for your business:
Calculate the break-even point.
It is critically important to determine the break-even point for your business. In this way, you will know when your business becomes profitable and also gives an early goal to strive for.
During cash flow management, keep your focus on reaching that break-even point. This type of analysis can be done in two ways: unit-based or dollar-based. 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 taking your revenue per item and subtracting it from the variable cost per item.
The final step is to take the fixed cost and divide it by that number. BEP, with the use of a dollar-based approach, involves taking a fixed cost and dividing it by the contribution margin.
Consider cash flow before profits.
It might sound contradictory, but this is a reality. Even if you reach your break-even point and your business is profitable, you still need to take care of cash flow management.
The next step after reaching the BEP is making an analysis of accounts payable, accounts receivable, and shortfalls. Then, determine whether any of them possess a problem for your business.
It might also be the case that your business is able to break even but it does not have any cash left. If this is the case for you, then it is time to have a detailed look at the aforementioned elements.
It will help you to figure out whether you need to attract new customers or it would be wise to cut the expenses. Even the smallest modification can have a great impact on the profit margin and provide you with an idea of what impacts your business most.
Try to have cash reserves.
Any business has shortfalls and yours is not an exclusion. The survival of your business highly depends on the ability to manage these shortfalls. If you start your business already with some cash in your bank account, it will make your life much easier.
It would be great to have cash reserves that will help you to last for the first three to six months. In this way, you will be able to protect your business from situations where a market dives into a temporary downturn.
Focus on collecting receivables ASAP.
Customers like situations when the invoice says “due in 30 days”. Even though it is good for customers, it is not good for your business. It is recommended to state “due upon receipt” on your invoice.
You can also delegate the task of keeping an eye on receivables to your employees. He/she will be responsible for contacting your customers and collecting payments.
Extend payables ASAP.
Approach to account payables should be the opposite of account receivables. It is advised to extend payable to net 60 or net 90 if possible. It 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 do not have enough cash to make payments, you will harm the relationship with them. They might also impose additional fees. Apart from that, they can withhold the next shipment, which will interrupt the whole production process.
Carefully monitor your cash flow.
Make sure you have a professional team in the finance department. These people should be completely informed about all the company’s finances. It is also important to have a person who will be responsible for monitoring the cash flow and informing you when the company reaches a certain threshold. For example, when your cash flow hits the $1,000 mark.
Apply technology to your cash flow management.
Specialists recommend keeping your cash flow spreadsheets in the cloud. Some of these sites are DropBox and OneDrive.
By utilizing these services, you will be able to access them from anywhere. You can also make use of professional accounting software. One important detail to be mentioned is security.
Thus, when using cloud-based technology, make sure to have the best security practices in place in order to protect the data. Security should be priority number one for your business.
See Also: How Cloud Technology Can Help Your Business Grow
Project future cash flows.
Estimating future cash flows is an important element of cash flow management. This is normally done with the use of historical data and market movements. Make sure to make projections for every month, quarter, and year. Precise cash flow projections can alert you to problems before they appear.
Without any doubt, it is almost impossible to make the forecast that will match with real 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 will be able to prepare your company for any difficulties that will come along the way.