Cash flow is one of the most critical factors for the success of a business. Exercising good cash flow management is important for businesses of all sizes, including start-ups. Here is how you can stretch and flex your cash flow projection muscles to develop this crucial area of your business.
Cash flow is the movement of funds in and out of your business. There are two types of cash flow, positive and negative.
Positive cash flow: This occurs when your sales and accounts receivables are bringing more cash into your business than you are paying out in expenses, salaries, and accounts payable.
Negative cash flow: This occurs when you are paying more out of your business than you are bringing in to cover expenses and AP.
According to the Small Business Administration, cash flow problems can be one of the leading causes of failure for businesses. Pair insufficient capital with lack of experience, poor location, or over investment in fixed assets, and you have a recipe for failure.
In order to effectively manage the inflow and outflow of cash, you need to regularly analyze your business cash flow. This process of cash flow projection should be an ongoing part of your business planning.
Cash flow projection will enable you to clearly see the money coming in and going out of your business each month, and what you are left with after expenses are paid. To determine your cash flow projections, you can create your own spreadsheet, or download a cash flow worksheet.
Timing is one of the trickier parts of calculating your cash flow projections, according to the SBA. The operating cycle of your business includes many moving parts, and your cash flow projections will revolve around this cycle of buying, selling, collection, credit, and operating costs.
One important consideration when calculating cash flow is cash reserves. The SBA recommends that a business always have enough cash to cover slow months in business, or 3-6 months reserves. If you have too much cash on hand, you may be missing out on opportunities to reinvest in and grow your business. Without reserves, a slow period or unexpected expense could get in the way of making payroll, or other crucial operating expenses.
There may be times when extra funding is necessary to pay employees or cover basic expenses for a short period of time. When you can clearly see that a business loan or short-term injection of cash is needed to keep your business operating, it will be much easier to get the funding you need. Knowing your cash flow projections allows you to plan for potential problems with your business.
Keeping track of your businesses cash flow is an important part of being a business owner. Too much cash on hand can limit your growth opportunities, and not enough cash can put you at risk of business failure. Monitoring and analyzing this crucial information allows you to see when to spend, and when financing can help keep you afloat. This one simple step can be the thing that keeps your business healthy and robust. Remember, in business – Cash is King.