Cash flow is a key factor in the success of any business. It’s the money that is moving in and out of a company every month, and if not managed effectively, could be the reason a business fails. When a company has a positive cash flow, it means that it’s running smoothly. What can you be doing to manage your cash flow effectively, and why is it so important? Find out below.
What are the different ways of managing cash flow?
When your business is in its start-up phase, it’s vital that you get organised and make a plan. To begin, write down all the one-time start-up expenses that you have either had to pay, or are expected to pay. This could include any legal or accounting fees, construction work, licenses or permits, inventory or any supplies, marketing materials and furniture.
Following this, it’s good to figure out your monthly expected cash sources, such as investments or loans that are coming in. After, keep analysing and assessing your expenses every month. Remember to include any utilities, rent or mortgage, advertising, payroll and travel. If you think that your costs are looking a bit high, consider where you can cut back.
Be wise when paying your bills. If you have got a full thirty days to pay a bill, then utilise all that time to build up the necessary cash. Remember that you could also ask about flexible payment terms.
Also, be prepared for the months when flow just isn’t there. In order to do this, build up some cash reserves.
Why is it important for you to manage your cash flow?
A healthy cash flow will help to ensure that a business has funds for expansion, is able to pay salaries and rent, and can cover expenses such as stock or materials. By keeping an eye on your business’ cash flow, you will be able to take action when it’s needed.
Research from the British Business Bank reveals that 36% of SMEs sought external finance in 2018-19. The coronavirus crisis has exacerbated this. Government is helping to some extent and public-backed schemes should be your first port of call if your business is struggling. If you need to find additional funds to plug your cash flow gap, then check out commercial funders including the likes of Nucleus.
How to keep on top of Cash Flow in the longer term
If you have an accountant, make sure that cash flow planning is part of your regular review sessions. If you do your own accounts, then you can download an excellent cash flow forecast template and view an excellent tutorial here.
Too many good businesses fail purely because they are not on top of their cash flow. The sooner you can get ahead, and put in place a process for the future, the better.