By Charles Dearing
When it comes to building and managing a small business, entrepreneurs must keep a close eye on key financial figures and figure out how much they’re spending and what costs they should trim down to ensure the success of their startup. Cash flow, in particular, is the blood that keeps a business alive, giving you a bird’s eye view of your company’s performance.
Just think about it. If you don’t have enough of it, then you may encounter problems paying your suppliers and your employees and maintaining your inventory. If you have an excess of available funds, then you may not be making the right investments, thus affecting your ability to scale your business and take it to the next level.
So, how can you reach the perfect balance? Here are five things you need to do to manage your cash flow more effectively.
1. Prepare a Cash Flow Statement
Before you can dive into performing an analysis, you need to create the cash flow statement first. This document will give you a comprehensive view of the amount of cash flow that pours into your business and how much you’re spending. Make sure to include everything in this statement, from your current operations costs to investments and financing activities.
Because keeping track of all this data can be a job in itself, a cash flow calculator can be quite handy for most entrepreneurs. Fortunately, with various financial tools that are available, you can quickly find out where your startup stands and determine what you need to do to maintain the business engine running.
2. Keep a Cash Reserve
Your purpose as a business owner is to scale your startup. As such, you need to keep tabs on inventory and gradually increase it. That may lead to periods when you don’t have enough funds to maintain your operations, and you must look for financing solutions. While this scenario is not ideal, it doesn’t have to mean the end of your business.
However, if you want to build a sustainable business, you should focus on increasing your cash flow gradually. So, plan everything accordingly and try to figure out what your startup needs before you run into a problem. Always keep a cash reserve for situations when you don’t have enough funds to maintain your operations.
3. Monitor Your Inventory
If the demand for your products keeps increasing, make sure you have the right financial solution in place to pay for inventory. Sure, a credit line may look like the right solution, but when you crunch the numbers, you may realize that it can negatively impact cash flow.
4. Plan Long-Term
Try to figure out your business’ future needs and find the best solutions to meet them. Don’t assume that if things are going well right now, then it will continue this way forever. A variety of factors could influence cash flow in the future, and you need to be prepared for every possible scenario. Determine your future spending needs, analyze your customers’ payment patterns, and try to forecast potential market slowdowns that may impact your business.
5. Prepare for Cash Inflow
As a business owner, it’s your responsibility to have a plan in place for managing cash inflow. Monitor your accounts receivables and try to determine how long it takes customers to pay you back. Try to stay on top of your accounts receivable balances and collections by reviewing your customers’ payment method and sending regular reminders. That’s one of the best ways to keep cash flow healthy.
Entrepreneurs have a lot on their minds and must focus their attention on a variety of moving pieces to ensure the success of their companies. One of the things that allow them to take proactive steps and scale their business is cash flow analysis. By keeping a close eye on their net income, they can determine how much cash their business is generating and what they should do to step up their game.