Business owners should know that the financial management of any enterprise is heavily dependent on cash flow. In business, cash is king. Whether your enterprise is struggling or growing, managing your cash flow is the key to its survival. Statistics show that a large number of businesses that are profitable face cash flow problems. This happens when you use a large amount of your working capital. You may come against a cash crunch that hinders you from buying stock, paying suppliers and paying salaries. The solution to all these problems is the management of cash flow.
You must work towards keeping a level of working capital; this will help your business survive crunch times. It will also enable you to keep your company in operation. Cash flow management basically means delaying outflow of money for as long possible: as you encourage your clients to pay within the agreed time. Below are a few tips you can employ to improve your cash flow management skills.
Ascertain your break even point
You should establish when your company will become profitable: this has no effect on your cash flow. The purpose of knowing your break even point is to enable you to make projections for future cash flow. As a startup owner, you should strive towards managing your cash flow until the moment your company becomes profitable. By conducting a break even analysis, you will be able to gather data in regards to your income and expenses. This will help you establish your break even point.
Your company’s finances should never mix with your personal finances. You can do this by setting up a different bank account for your company. You can request your bank to issue you with a credit card for business-related transactions. Credit cards offer reports detailing all purchases and transactions conducted within a month. This information will help you make an effective cash flow budget for the next financial year.
Monitor your inventory
You must always analyze the movement of your inventory frequently. This helps you determine goods that sell and those that do not. Goods that do not sell have a negative effect on your working capital: they soak it up. By keeping an inventory, you will be able to sustain your working capital; this ensures that capital is not tied up on unprofitable and unproductive things.
Business owners are leaders in their own respect. For you to stir your business in the right direction you must exercise emotional intelligence in the workplace. This will ensure effective implementation of your visions for the business
Keep a rainy day fund
Once you establish your break even point, you should ensure that your company has adequate money to fund the needs of the working capital. You are advised to maintain, at least, three months’ of outgoings in a separate bank account for rainy days. This is also known as buffer money. Buffer money may be personal savings, bank overdrafts or a revolving credit facility.
Implement effective cash flow systems
Many business owners fail to invoice customers in good time. Some business owners do not know how much is owed to them and how much they owe their suppliers. You risk the survival and success of your company by not implementing efficientcash flow systems. You can avoid this by using accounting softwares or spreadsheets. This will help you keep tabs on transactions being conducted. Secondly, always ensure that you invoice your customers as soon as they receive a delivery of goods and services.
High costs of operation are a leading cause of business failure. You must always ensure that money is used for productive and profitable activities. Some startups ignore cost-cutting opportunities once they break even. Poor management of cash outflow is a silent business killer.
Keep Your Cash Growing
You should always keep your balances in accounts that earn interest; these accounts are available in most banks. However, some banks require you to have a minimum balance. Interest rates for these accounts are normally lower than those of certificates of deposit, savings account, and money market accounts. You should consider keeping the bulk of your money in high-interest accounts. Without adequate cash flow, profits are meaningless. Your business may be profitable on paper but still end up bankrupt.