Getting a handle on your cash flow doesn’t
have to be difficult. That said, it is arguably the most important factor in
keeping your business afloat, as well as when qualifying for financing.
According to the Small Business Administration (SBA), 20 percent of
small businesses fail within their first year, and as many as 50 percent don’t
make it past the five-year mark. Why? Between payroll, inventory, utilities,
and outstanding invoices, many small businesses have trouble maintaining enough
cash liquidity to cover their operating expenses.
In order to keep your doors open, pay your
employees, and invest in your growth, you need to have positive cash flows. In other words, you need to
have more cash coming into your business than you spend at any given time.
And while this may seem challenging, you can
take the mystery out of cash flow management by following three simple steps.
1.Constantly Monitor Your Cash Position
For a business to be successful, it needs to
put itself in a position to seize opportunity. This often means having
sufficient cash liquidity at all times. But in order to maintain a proper level
of usable cash for your business, you need to start by constantly monitoring
your cash position.
Monitoring your cash flow starts with tracking
your accounts receivable and accounts payable to anticipate the movement of
cash in and out of your business over time. While small businesses generally
track their cash flow weekly, monthly or quarterly, it’s best to do so on a
rolling basis.
There are many ways to monitor your cash
flow:
·
DIY
spreadsheets and templates
·
Reporting
software that generates cash flow statements
·
Bookkeepers
and accountants
The SBA even offers a free cash flow worksheet and templates that are
readily available with a quick online search.
Building your own worksheet can be
time-consuming, and hiring a professional to handle your finances may be cost
prohibitive. Fortunately, online cash flow management
tools take
the headache out of monitoring your liquidity, analyzing the data, and taking
corrective action.
2.Analyze Your Cash Flow Patterns
Once you’ve tracked all of your transactions
over a given period and generated a cash flow statement, it’s time to analyze the
numbers to identify trends and pinpoint shortfalls.
Look for patterns of positive cash flow as
well as the shortfalls, and don’t forget to monitor the timing. Spotting trends
will help you forecast, anticipate, plan for, and (in the case of shortfalls)
prevent similar issues moving forward.
Don’t forget to look for unpaid invoices and
unexpected costs that may be affecting your cash flow. If the same vendors
repeatedly violate your payment policy, or if unexpected costs are consistently
affecting your cash liquidity, you should take corrective action to prevent
future cash shortages.
Online tools like FINSYNC visualize cash flow
patterns and trends, as well as the financial impact of your previous
initiatives so that you can focus on strategy, decision making, and preventing
future cash flow issues.
3.
Forecast,
Project, Act, and Optimize
Once you have a complete picture of your past
and present cash flow trends, it’s time to consider the future. Cash flow
projections are a great way to plan ahead, avoid shortfalls, and anticipate any
potential upcoming business needs.
Forecasting removes the guesswork from your
planning allowing you to make better business decisions about growth, financing
and more. With a little foresight, you can monitor your accounts payable and
receivable relative to your projected cash flow and make any necessary
adjustments to remain cash flow positive.
Making projections doesn’t have to be
difficult; the recent past is generally a solid indicator of what the next few
weeks and months will entail for your business.
Most businesses don’t have the time or
resources to analyze spreadsheets, identify trends, and make projections. This
is especially true if you have to manually compile and visualize the information.
Instead, many SMBs are turning to intuitive online tools to do the busy work for
them. This makes projecting your cash flow simple so you can focus on making
better business decisions.
But it doesn’t end there. Did you know that
understanding your specific cash flow needs and maintaining a comfortable level
of liquidity can help you qualify for business financing? After all, your past,
present and projected cash flow is a big part of the approval process for
online lending networks.
You’ll strengthen your case with cash flow
projections backed by historical data that shows lenders exactly where your
business is headed — and how you’ll pay back the funds you’re requesting.
Whether you’re trying to keep your business
afloat, qualify for financing, or both, mastering your cash flow is key to your
success. Without proper planning, even the most profitable businesses can run
into serious trouble when hit with cash shortages.
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