Experienced entrepreneurs know navigating cash flow cycles is an art. Businesses go through natural, predictable ebbs and flows. Newer business owners, however, are unlikely to have large cash reserves, and one wrong turn can be detrimental. That's why it's so important to have a cash flow management plan that empowers the business to maintain long-term health, which requires careful planning.
The following steps provide a guide to navigating this seemingly daunting maze:
- Don't take on more debt than your business can handle
- Analyze operations - Cash flow is closely tied to a business's internal operations. It is important for business owners to monitor trends and analyze their products and services regularly.
- Scale steadily - This is the top area that people either ignore entirely or give too little attention to. Your financials are your business's ultimate metric, keep them clean and well organized, and look at them to find areas of incremental improvement. Businesses can use their financial records to forecast areas of opportunity — as well as potential risks and weaknesses. Properly maintained financial records will give you a quick look at where you are spending your money. This will help you identify where you can eliminate unnecessary or overpriced expenses. Using this data, business owners can identify areas in which to scale incrementally. This step-wise approach can help small businesses manage their cash flow while pushing their growth plans forward.
- Understand your operating cycle - Regardless of size, every small business must deposit, monitor, and manage cash receipts; make payments; fund purchases; and invest in the company. Reviewing and understanding each step in this cash-flow cycle can help a company work more efficiently.
- Review your payroll process - If you pay your employees twice a month instead of every other week, you will be managing 24 payroll periods instead of 26 during the course of a year, making your company more efficient.
- Keep good books - Many small business owners let their bookkeeping fall to the wayside because they’re so busy operating their business. Small business owners wear many hats, so it's understandable to be busy, however if the books aren’t organized, troubling times lie ahead.
- Don’t delay or put off taxes - Every quarter look at your earnings and expenditures and estimate withholding taxes, land taxes, and other liabilities. Also look at what you bought over the previous quarter that could be a write off for your filing. Work with your accountant and tax professional to make sure you aren’t taking too much money out of your revenue.
- Make a budget for your monthly expenditures - Look at the past 6 months and see what you spent monthly for business costs. Include your office supplies, employee costs, utilities, and material. What you’re looking for is any “leaks” where small amounts of money are being spent but not recorded. This usually occurs when money is taken out of cash to pay for supplies that ran out employee costs that were ignored in the past. They are small sums of money bit they can add up. Stopping these leaks can keep cash in your account ready for unexpected costs.
- Start an emergency fund for your business - No matter how small amount you can add to it, put it in. Then consistently add to the account as you move along throughout the year. Even when things are tight for a month don’t neglect putting a little money into this fund. It’ll help tremendously when an emergency occurs.
- Always know what the bottom line is for your business - This may seem self-evident but there are plenty of small business owners who have no idea how their business is doing on a daily, or even weekly business. Don’t guess, it's important to have a hard number in your head for the worth of your business. Also, keep track of seasonal changes to the bottom line; if you produce a product or service that is more seasonal. The idea is to gauge those times when you’ll have plenty of cash in the bank for a solid cash flow. Just remember, being busy doesn’t equal money in the bank. It’s only after clients have paid you that you can count on the cash.
- Cash flow forecasting - With a cash flow forecast, you’ll be able to see which months you can expect to see a cash deficit, and which months you can expect a surplus. You’ll also be able to get a pretty good idea of how much cash your business is going to require over the next year or so to survive. You can gain a lot of insight into your business by comparing actual figures to what you forecasted. If there are discrepancies between the two numbers, dig further to see what might be happening.
- Access capital at the right time - Capital is so important to growing a business. If you don’t have what you need for your business’s development, all you’re doing is paying your bills and just getting by. Having enough working capital to pay those bills on time every month is important, but to take your business further, it’s growth capital you should be paying close attention to. To do that, you have to understand how growth capital works, what it does, and how it helps your company develop from a small business to something much larger and stronger.
Business owners don't become expert cash flow managers overnight, both their skills and their businesses will take time to build. A commitment to controlling debt, optimizing operations and smart, steady growth is, ultimately, the key to healthy cash flow.