Since cash flow is the lifeblood of your small business, understanding cash flow and how good management affects your business is vital to your success. This makes it important to take special care with inventory, sales cycles, and accounts receivable time frames, and it also pays to watch out for economic shifts that can tighten cash flow and thus hamper your business’ growth. While it might seem like just a matter of having more cash coming in than going out, good cash flow management requires a focus on certain fundamentals.
Know Business Variables That Can Affect Cash Flow
Effective cash flow management means understanding how your business reacts to numerous expected and unexpected variables. You can easily prepare for some of those expected variables, including seasonal shifts, inventory cycles, and monthly sales fluctuations, and even build them into a 12-month cash flow projection. Keep in mind that other variables — both negative and positive — can appear out of nowhere. For instance, new or increased competition has the potential to decrease your sales, while sudden business opportunities can leave you rich in new assets but poor on actual cash. Key employees you rely on might suddenly leave, and vendor relationships can change as can customer relationships.
These unexpected events have the potential to shift your business variables. This makes it important to prepare for cash flow shortages by building some padding into your cash flow so your business can weather any difficulties. To do this, try to set aside a three- to six-month cash reserve and keep a reliable lending source in place to help you through if you fall short. Also, it helps to pay close attention to vendor and customer relationships and keep a close eye on what’s going on within your particular market niche.
Anticipate Future Cash Flow
Without proper planning, growing businesses sometimes reach critical points that can become major obstacles to future growth. You can avoid this by keeping a firm grasp on your business’s projected spending needs and cash flow forecasts. For instance, if you run into a cash crunch when trying to take your business to the next growth level, you might consider seeking financing or investor options. Keep in mind that most lenders want to see that your business can hit cash flow and profit milestones within certain time frames. You can demonstrate this by managing your cash flow based on a 12- to 24-month cash flow projection and sharing this information with your lender before the need for extra cash arises. To simplify the process, consider accounting software such as QuickBooks Online that uses your bookkeeping data to provide quick, simple cash flow projections.
Monitor and Adjust Cash Flow Projections Frequently
Monitoring your cash flow data monthly makes it easier to identify potentially problematic trends on both the expense and revenue sides of your ledger. Key indicators tend to show up on your bottom line either as an anomaly or as a trend, including slowing receivables, uneven payables, increasing costs, and erratic expenses. You can stay on top of these issues by comparing your monthly data against cash flow projection benchmarks. If your business doesn’t meet one of these benchmarks, you can makes an adjustment to your cash flow projection to factor in changing variables. It also helps to consistently question your projections and assumptions. This helps you keep your cash flow estimates realistic by ensuring you don’t overestimate inflows and underestimate outflows.
Keeping a tight focus on your cash flow can make all the difference in your business. When you know what to expect and have contingencies in place for when your projected cash flow runs short, you can keep your business stable while ensuring steady growth. Improve your cash flow with invoices, payments, and expense tracking. See how much cash you have on hand with QuickBooks.