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Steps for Managing Your Cash Flow

Small business owners inevitably juggle many competitive priorities. While it can be challenging to keep everything running smoothly, “dropping the ball” on cash flow can be a costly oversight. Effectively managing the money flowing in and out of your company is key to staying in business. As you plan for success, three basic steps can help you successfully manage your cash flow: tracking, analysis, and budgeting.

Tracking Inflows vs. Outflows

For most businesses, cash flow is an ongoing process that tends to repeat itself as money cycles in from sales and out for expenses. Inflow refers to the money coming in to your business, for example, through the sale of goods and services or from the proceeds from a bank loan. Your business expenses, such as buying inventory or paying off a loan, represent your outflow. One of the greatest challenges small business owners face is timing when money comes in and when it needs to go out. Even businesses with steady annual profits may face times of the year when money is tight—periods when there is a greater need for cash than there is cash on hand.

One important tool that can help you track your inflow and outflow is a cash flow statement. This basic document records the date and nature of all cash inflows, as well as the date and nature of all outflows—tracking the movement of funds, typically on a monthly basis, over the course of a year. Your profit and loss statements and your balance sheets can be great resources for this information. With a detailed cash flow statement, you’re ready to analyze your situation and make projections.

Cash Flow Analysis

Understanding your cash inflow and outflow patterns can help you make the most appropriate money management decisions. As you analyze your inflow resources, study the ways in which accounts receivable and credit affect your cash flow. Accounts receivable are sales that represent a promise to pay, rather than immediate cash. When you extend credit, you are essentially making a loan. It is important to understand your financial capacity to provide credit, as well as to establish policies that help you collect what is owed on time. Mismanaging either one of these inflows could lead to negative cash flow.

As for your predictable outflows, you may find that, by staggering payments, you can free up cash for others. For example, seasonal businesses may find that rescheduling payments can help ease cash flow during slower months. Other businesses may find that carrying less inventory helps cash flow.

There are several warning signs that may hint at cash flow problems. Consider the following five indicators:

  1. Difficulty meeting payments
  2. Excessive or obsolete inventory
  3. Inability to make economical purchases due to lack of cash
  4. Outstanding receivables
  5. Excessive short-term debt

Planning ahead may help you maintain positive cash flow and avoid problematic shortfalls.

Preparing a Budget

In addition to helping you with your daily money management decisions, a cash flow budget can help you plan for future growth and expansion. Your budget can be as basic or as detailed as you need it to be, providing monthly breakdowns of cash inflow and outflow, or weekly or daily projections. Based on your analysis of your past cash flow, consider making a plan for the next year.

In order to estimate your future inflow, you’ll need to forecast next year’s sales. Using last year’s figures may help you. Remember to factor in any relevant variables, such as economic trends or developments in competition.

As you predict your outflow, be sure to account for your operating expenses, accounts payable, and loans. The more accurate you can be, the easier it can be to predict shortfalls and find solutions. Keeping good records and thoroughly evaluating your financial history may make it much easier for you to project your needs.

In addition to providing you with the information you need to make sound business decisions today, a detailed cash flow analysis and budget can help you plan for tomorrow. Successful money management lays a strong foundation for profitability and growth. All in all, smooth cash flow is good for your business.

Copyright © 2016 Liberty Publishing, Inc. Beverly, MA All Rights Reserved. - BPGCASHF-SQ

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