Many business owners get anxious about their business finances and money management. Ensuring you have a sound cash flow management system will help remove the anxiety around money and keep you on top of issues before they become problems.
Cash flow is the lifeline of your business. Knowing the backend of your business is essential to keep your business running smoothly.
A cash flow statement is one of the three most essential financial statements for a small business. A statement of cash flow is a formal statement used to report at a specified time. It shows investors how the business is performing and how the cash flows in and out of business. This statement is essential since it helps investors determine whether a company is on a solid financial footing.
Cash flow statements are different from having a cash management system, as the statement reports historical activity.
Cash flow management systems project six to eight weeks in advance of all the money expected to come into the business, all the money expected to go out of the business and considers the timing of it all. This way, if you anticipate a cash shortage, you can turn to a backup plan, likely a cash reserve in the business, to ensure all your financial obligations are met.
Having an effective cash flow management system in place in your business is recommended.
Here are some tips you can use to managing the cash flow in your business:
1. Ensure your business is profitable
Profitability is what generates cash injections in your bank account. If your business is not profitable, this will create a cash flow issue.
2. Keep your debt ratio low
When you are carrying too much debt, you put your business at risk of being unable to meet its financial obligations. Debt repayment can be expensive, and if your business isn’t bringing in enough revenue to cover all expenses, including debt, that results in a debt burden.
3. Project cash flow going in and out 6-8 weeks ahead
When you project the cash activity ahead of time, you will be aware of when cash shortages present themselves and will be proactive rather than reactive. You’ll feel confident when you have a plan in place, and you know that your financial obligations are being met.
4. Keep a cash reserve
The smartest choice you can make to protect your cash flow is to ensure that you have a cash supply such as a line of credit that you can dip into (and repay quickly) to tie you over should there be a cash shortage.
5. Keep your accounts receivable current
Often business owners fail to monitor which customers are lagging in payment and wait until it is too late to collect those funds owing to them. In the spirit of good customer relations, it is essential to keep on top of the account collections in your business and keep open communication with your clients. It’s bad business and expensive to lose a client over an overdue invoice that they dispute.
6. Keep your payables current
It’s just as important to keep your payments current and not have any outstanding payments to make. Unpaid bills often come with financial penalties and interest charges, so it is smart financial management to pay promptly and be in good financial standing with your suppliers.
The bottom line is that cash is the lifeline of your business, and it is vital that you manage your cash efficiently and effectively in your business. Many accounting software programs generate these reports for you, so I encourage you to use your resources.