Cash flow is an integral part of any successful business strategy. Attempting to run a business without a good cash flow strategy is like trying to sail a ship across the sea without a rudder. You might make it a decent distance into the deep, but eventually you will crash or sink. Even if you make it for a while, you will be out of control and without direction. It is not a sustainable way to run a business.
While cash flow strategy is vital for all businesses, startups and new businesses in particular depend on it completely. If you try to launch a startup without a sound cash flow approach, you will be lucky if you make it a year without going under.
There are three core elements to a good cash flow analysis, and they are as follows:
- Accounts Receivable is what customers and clients owe you.
- Accounts Payable is what you owe vendors and suppliers.
- Shortfalls are situations where income from Accounts Receivable is insufficient to meet the expenses of Accounts Payable.
A successful business adequately manages all three areas, and ideally does so with some amount of comfortable surplus or margin between Accounts Receivable and Accounts Payable. If you sail your business’s ship wisely and with the currents, you can have a much smoother and quicker voyage. Your business will be better off if you manage cash flow with a favor towards profitability, rather than merely breaking even. In this article, we will examine several tips to help you manage cash flow effectively to help you generate a profit and maintain that adequate margin of cash reserves.
1. Calculate Where You Will Break Even
This is the first step towards profitability. If you can’t break even, you can’t make a profit. It’s that simple. Of course, figuring out your break even point will not effect your cash flow, but it will provide a key baseline which will become integral to your cash management strategy later on. You will have a goal to aim towards and a target for future cash flow projections. If you have negative profit and negative cash flow, your business will be in a sad state of affairs. Focus your cash flow management strategy on that point where you will cross the line into profitability.
2. Focus on Your Cash Flow Management, Not Just Profits
While this may seem rather counterintuitive, cash flow management is the bread and butter of daily business. If you do it well, the profits will come. Using your break even point as a baseline, manage your business’s cash flow strategy to create a profit, and then stick to that strategy after you have become profitable so you will remain so well into the foreseeable future and beyond.
Once your business has achieved the status of regular profitability, you will need to remain strong in your cash flow management as you enter this new phase of your business and it grows to reach maturity and stability. If you can achieve and maintain this state, your business will have reached a new stage in its life.
3. Build up Cash Reserves
Eventually, there will come a time in the life of your business where it is hard to make ends meet. Accounts receivable may not always add up to equal Accounts Payable, and you could find yourself with a shortfall. If that happens without adequate cash reserves, you could end up in a bad situation with negative cash flow and negative profits. To prevent this situation from happening, you should build up a comfortable level of cash reserves to create a margin of safety. This way, you can draw on these accumulated cash reserves to meet the needs of the business during dry spells without going into the negative and perpetuating the problem. This way, you can bring your business through the rough times without creating debts you’ll need to repay later on.
4. Utilize a Cash Flow Worksheet
If you can’t measure it, you can’t control it. You need to maintain a clear picture of your business’s cash flow situation and projections. A good starting point for this is to create a spreadsheet to track cash flow details and create charts and projections that you can use to plan accordingly.
5. Collect Your Receivables Promptly
When customers or clients owe you outstanding debts and you don’t collect on them, you don’t have access to those funds or even a guarantee of payment. They could default or postpone their payments, and you could end up needing that cash to meet the demands of Accounts Payable in the meantime. Rather than exposing your business to these risks, it is generally wise to collect on accounts receivable as quickly as possible after they become due. This means avoiding net-30 and net-60 terms in contracts whenever you can. Obviously, this may not be realistic in all situations, but the general principle remains: you can’t spend money you’ve earned but don’t have, and you don’t have money you haven’t collected.
Now, there is a fine line between being a stickler for enforcing good collection policies and maintaining amicable and healthy relationships with your clients and customers. It will be up to you to know the relationships you have with customers and the needs that they have, and to find a happy medium that creates positive and lasting client relationships. This usually comes down to respectful, clear communication up front. If clients know your payment terms before they agree to them and you communicate those terms clearly beforehand, this will prevent many future problems from occurring and ensure things run smoothly.
6. Provide Incentives for On-Time Payments
Along the same lines as the above point, it is important to create motivations for people to pay your invoices on time. You could consider offering customers and clients rewards for paying early and penalties for paying late. You could keep credit requirements strict and provide discounts for early payment. If you normally extend credit, you should keep a list of credit requirements in writing that clients must adhere to in order to qualify. These requirements only work if you enforce them, so it is important that you do so kindly but firmly.
7. Put Someone in Charge of Monitoring Cash Flow
This may go without saying, but it is helpful to have one person in your company who keeps a regular eye on cash flow and updates you regularly as necessary to show what needs to be adjusted to ensure certain minimums are met and profitability targets are reached.
8. Utilize Cloud-Based Technology
Another simple tip is to use cloud based technologies like Google Drive, DropBox, iCloud, SkyDrive, or others to store your cash flow spreadsheets. Then, you can invite each relevant employee or manager to share them and collaborate on them from anywhere. This way everyone who needs access to the data has access to it in real-time, from any device, worldwide.
As long as you maintain positive cash flow, your business will be on track to do well. Hopefully these tips help you with your cash flow management strategy. Do you have any tips on cash flow management for others? Feel free to share them in the comments below.