Planning, managing and monitoring cash flow are crucial to staying in the black when running a business.
It is crucial for you, whether you are a small or large enterprise, to know how much money is coming in and how much is going out. Spending more than what you are earning could spell the end of your business operations, but you can avoid this if you plan, manage and monitor your spending with diligence.
Projecting cash inflows against cash outflows
To manage cash flow, you can start by assessing how much money is coming in and going out on an annual basis, which can be broken down into monthly accounts. It is crucial to record the amount spent and received in the month to get a better assessment of the business’s financial standing.
For instance, if you pay electricity every quarter, the payment for it must be recorded in the month it is due.
By doing so, you can project the months when you are on a tight budget and keep from making additional expenses. Here is how to organise your spending record.
First, log in the total monthly cash inflow, including sales, sales of assets, capital additions from borrowings or loans, interest revenue and any sources of cash inflow.
Next, list down the total monthly cash outflow, such as purchases, payments for loans, supplies and utilities, wages and any bills that require spending cash. The total sum must be subtracted from the total inflows to get the net cash flow, which will identify if you are earning more or paying more.
Finally, you should add the net cash flow to the opening balance, or the available cash at the beginning of the month, to get the closing balance.
Moreover, recording your cash flow will provide you with a picture of your financial standing. With this, you can assess your targets, review forecasts, adjust plans, among others, as amounts change over the year.
Managing cash flow
After recording your expenses, the next step is to manage cash flow by cutting down on spending and increasing profit.
Cut costs: Cancel subscriptions and services you are not using or are no longer necessary to your operations. Renegotiate the terms of outstanding debts and loans. Reduce your usage of power and water to bring down operational expenses.
Turn assets into cash: To generate instant cash, consider selling equipment that has turned obsolete. Owning many assets will only restrain cash flow and increase storage and insurance costs, therefore, becoming liabilities to the business.
Manage accounts: Follow up on overdue debts. Regulating debtors and implementing sound credit policies will keep the cash coming in. Also, consider asking for deposits or partial payments on large orders or long term deals to generate enough money to buy the materials and pay the workers needed for the job.
Study financing services: Utilise banking transaction products to acquire cash the fastest. Think about possibly taking payments through electronic devices.
Hike your income: Review the prices of products and services. Use an advertising campaign and improve customer service to resonate the business’s brand to the buying public. Consider expanding operations to grow profits.
Improve financial skills: Improving cash flow requires better management and financial capabilities. Attend workshops on how to manage finances, or get advice from a professional accountant or financial adviser, who can provide your business with market insights on the industry in which you operate.
Evaluating business performance
Managing cash flow can help you determine the financial standing of your business as making data-backed determinations is crucial when deciding on important matters such as venturing on a marketing campaign or setting up new shops.
You can then compare your cash flow with your competitors to get a good grasp of how you are faring against them. Knowing for instance if you’re spending beyond the spending trend of your competitors on one cost-item will compel you to work on at levelling with them on that area.
Furthermore, knowing your cash flow can be used to compute financial performance, as financial ratios are usually used by firms to measure progress. Financial ratios are also studied by lenders and investors to determine the financial situations of their clients and partners.
You must also consider how your plans and purchases could impact your cash flow and vice versa—for instance, if your current income can sustain an expansion move.
Say, spending on a marketing campaign could lower cash flow initially, but with good results could augment cash flow later. However, it would be best if you also strategised on how to cover the financial gap in the short term to gain the benefit later on.
If you’re set to seek a loan, evaluating current and even possible cash flow—coming from an expansion move or upgrade if that is the purpose of the loan— will be needed. This practice will help you, as well as prospective lenders, determine whether your business can handle repaying a loan with all its interest charges and other extra fees.
Managing cash flow, as most accounting and business experts put it, can help identify the risks and opportunities of a business, as well as if it is treading the right direction toward its goals.
Staying on top of your cash flow is key to survival, if not for the success of a business. A few missteps on cash flow could put any enterprise in a money crunch.