What is Cash Flow Management?
Cash flow management is important for all businesses, but it’s critical for early startups. If you cannot manage your cash flow within the first year, you will likely not survive past the second year.
Poor cash flow can result in your business lacking the funds to pay suppliers or cover immediate needs.
A line of credit can only carry your business so far. Once your credit cards and loans are maxed out, you’re left needing cash or faced with the reality of shutting your doors.
Fortunately, you can perform a cash flow analysis to get an idea of whether you have positive cash flow or negative. Then you can take steps to move your business in the right direction.
To perform a cash flow analysis, you’ll need these three key elements:
- Accounts receivable: What customers and clients owe you
- Accounts payable: What you owe your suppliers
- Shortfalls: When you owe more than what you have on a liability
You must effectively manage all three if you want to navigate your business to success. An imbalance in one area, like having clients that owe you too much or you owing suppliers too much, can throw your cash flow for a loop and ultimately hurt your business.
To actually determine your current cash flow, you’ll look at how much money you have coming in, and how much you have going out. If you have numerous customers or clients that owe you money but have yet to pay, make sure you’re not considering this as part of your cash flow.
Bad debt is exactly that, bad, and it isn’t helping the amount of cash you have on hand.