Our Top 10 Cash Flow Tips-Part 1 of 2

1. Know your business’ balance sheet thoroughly.

This may sound obvious; however, many people don’t know how cash flow works and its significance to sustaining their business. Many owners focus on their profit and loss statements alone. Unfortunately, healthy profits can mask an impending cash flow crisis. Profit and loss statements don’t usually contain the information required to make an adequate cash flow projection. For that, you need a structured balance sheet that includes all the influencing factors including debts, interest payments, inventory and so on. This is the basis for your cash flow projection which represents the likely incomings and outgoings over a particular period of time.

2. Set up a cash flow budget.

You need to focus on forward planning to generate a “best guess” about likely future sales and expenses. You can set up your own program in Excel. If you’re not familiar and skilled with Excel software, ask your accountant for help to set it up properly initially.

3. Review and update cash flow budgets regularly.

This is your best insurance against potential cash shortages. If your business has a predictable cash flow, then cash flow budgeting on a quarterly basis is often enough. The rule of thumb is that the greater the cash flow uncertainty a business faces, the more often a new cash flow budget should be prepared.

If cash is really tight, you might need to move to weekly projections and decide which invoices you’ll pay and whom you need to get payment from as soon as possible. Watch bank balances and make sure you don’t have checks waiting to be deposited. This can be time consuming, but you won’t be the first business that has had to do that from time to time.

Rapid growth sounds good but, ironically, too much of this good thing can bring on a cash crunch – which takes many business owners by surprise. Strong sales one month often means a cash shortage next month. By monitoring the business’ cash status you may be able to arrange credit from suppliers and banks to cover the temporary shortfalls. However, these arrangements take time to set up so you need to be prepared in advance.