Managing cash flow is critical to the success of a small business. While it is necessary to be profitable, your profit is a number that shows up on your accounts at the end of the year whereas your cash is the money you have in the bank. In a small business, it is cash that determines whether you can pay your expenses. By incorporating the following tricks, you can help to maintain the flow of money coming in and keep the business running smoothly.
Prepare a cash flow projection:
There are always unforeseen challenges or changes in the marketplace. While you won’t always be able to predict or forecast these, you can gain a better grasp on industry trends and patterns. No matter what business you’re in, you’re going to have a lag between outgo and income, often having to pay for raw materials and equipment before seeing a payment. Drawing up a cash flow projection can help you plan the ups and downs of your spending. In your projection, be sure to include:
- Cash receipts, including income from sales and income from financing.
- Cash disbursements, including all expenses (cost of goods, operating expenses, loan payments, income tax payments, etc).
- Net cash flow — opening cash balance plus receipts, minus disbursements.
- Ending cash balance.
Generate new business:
The business is going well; you’re meeting your targets, money is coming in, and you’re happy. This is not a time to relax, it is a time to be seeking out and generating more business. Cash flow may keep your business alive, but sales are what keeps cash flow alive. Keep expanding and preparing your business to cater for growth. This will help prevent you from chasing your tail when times are tough.
Be prompt with billing:
Businesses don’t get paid unless they send their invoices out. Many businesses, however, delay sending out their bills. This may be for various reasons such as feeling uncomfortable asking someone for money, being afraid of confrontation over how much they’ve charged, or just too busy working to compile and send the bill. The longer you wait to send out your invoices, the greater the chance you won’t get paid.