What do you think is the most important life blood of the business? Is it profit, sales development, or customer loyalty? While they are several important arteries of blood circulation for a business to survive, they are not the center which keeps the business alive. You can have almost all three and still go out of business if you do not have the one thing all companies have to live; which is cash! It takes money to pay your employees, turn the particular lights on, open the door, and maintain it open.
Having cash offered when you need it is crucial but you also have to know how and when the cash flows in and out of the business. You just don’t “know” these things. There are skills involved to measure, monitor, and manage cash.
How you can make cash flow work for you rather than towards you are summarized in the following five rules.
Know How to Measure It
Initial, understand the income or profit plus loss statement is not the same as income. These are valuable analytical tools but only measure performance at a specific moment in time.
A cash flow statement, on the other hand, shows the movement of money out and in of your business over time. Consider this being a trend report. A balance sheet may be the one other tool that measures money but again, only at a particular instant. It is just like a snapshot while the cash flow analysis is like a movie.
Understand the Causes of Cash Flow Problems
Cash flow problems can occur in any number of business lifecycles. Most commonly they occur in investing or receiving. Makes sense, since cash flow is cash coming in and cash going out.
If you want to grow, you have to spend money on things like people, equipment, facilities, or inventory and that takes money out of the business. On the other hand, your clients may be slow paying and your company are not able to create enough cash. A income trend sheet can forewarn you of these needs for cash. If you are facing rapid growth, declining product sales, or long collection cycles consider yourself prepared.
A cash flow analysis can also show you cycles in your company. This can be a valuable forecast of company expenditures like marketing costs to support a big sale. If the sale is a success then you will see cash get the business and you can form a plan to utilize it for continued growth. By tracking and trending the business income by month, it will make it simpler for you to plan your business next year.
Build Strategies That Can Maximize Cash Flow
A single key here is to minimize fixed expenditures. Call suppliers and see if you can get a discount. Find a way to handle spikes within your business without hiring additional people. Minimize your cash needs and save cash in the business.
Consider non-cash intense payment options. Have you ever tried bartering? Make sure you are using business credit cards that will award travel points to minimize cash expenditures on future business trips.
Establish clear payment terms and expectations with your customers and have a formal receivable collection process in position. Consider discounts for prepayment or even require a deposit for large buys.
Prepare For the Worst
When you see the trend that is restricting a positive cash flow, then you need to have tools at hand to correct the problem, fast. When developing an intend to infuse cash into the business, be sure you line up the sources for the suitable use. For instance, short term cash problems can be handled with credit cards or perhaps a line of credit. Longer cash flow needs might be financed through long term secured loans or even a capital loan.
Other ways to improve income might be to improve inventory turn plus carry a lower supply of inventory. Make sure you have no cash sitting around; deposit checks the same day you receive them. Avoid slow paying customers. Create slow pay customers pay their bill before placing another purchase. Pay your bills on the final date they are due. Consider leasing instead of purchasing equipment.
Do a business plan and a cash flow forecast, by month, at the start of every year. Post your actual cash in/cash out accounts at the end of each month. Arrange for growth. Ideally, every cash expenses should generate cash in return.
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It might take a few months or years but an excellent return on investment is the purpose of any growth strategy. Make a complete analysis about how exactly much you have to spend to meet growth opportunities and how long it will be before you decide to will be able to pay it back; more importantly, how you are going to pay it back.
So in the end, your business complements the flow, cash flow that is. If it’s positive, survival will most likely continue. If it’s negative, your business will be terminal. Really only a matter of time.