Monitor your cash flow closely. Make projections frequently. By closely monitoring key cash flow data or variables, you can make better, more accurate, more up-to-date projections of future cash flow and you will be more likely to keep your business out of trouble financially.
Prepare a thorough, accurate cash flow forecast. When forecasting sales and expenses for a given period, keep in mind historical figures, such as customer payment histories, industry norm, averages and trends, plus current economic and business conditions. Project monthly cash inflows and outflows during the period. As you go through the budget period, compare and update your budget based on actual monthly performance.
Your cash on hand at the start of the period + estimated cash inflows – estimated cash outflows = net cash balance.
Understand basic accounting. By knowing the key concepts of basic business accounting, you will be able to read and understand financial statements, and you will be more capable of monitoring the financial health of your business and making sure you stay cash flow positive.
Have an emergency backup plan. You do not want to find yourself in a worst-case scenario in which you are close to a cash flow crisis. A clear, well thought out back-up plan can provide you with peace of mind and a source of reserve cash in case you need it one day.
Grow carefully. Growing your business too quickly can be highly risky. As you ramp up to sell more, you first need to spend more, buy more raw materials or hire more staff. If the amount of time between your increased cash outlay and increased sales is too long, you could find your business starving for cash. So, take precautions when growing your business and identify financial risks and have a business growth plan in place that avoids long delays between cash outflow and inflow, and that pays very close attention to managing cash flow.
Invoice quickly. Any delays in invoicing your clients will only add to your wait to receive payment for your work. Small businesses should invoice clients as soon as the work has been completed.
Bank balances. Cash in the bank is important, but it is just one of numerous components to consider when looking at the full flow of cash: from paying for raw items, to producing them, to hiring staff to sell them, to invoicing, to collecting on those invoices.
Sales.Sales is only the beginning of the process of generating cash flow, but obviously without it, you do not have any cash to receive.
Receivables. Ideally, you should keep your accounts receivable down to the lowest level possible. One goal is to have next to no receivables beyond 30 days of billing.
Payables. Pay close attention to what you owe. If you pay your bills sooner than you need to, you might risk leaving your business short of cash. However, paying too late could result in penalties and possibly hurt your relationship with vendors.
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