Business magnate, investor, author and philanthropist, Richard Branson said, “Never take your eyes off the cash flow because it’s the lifeblood of business.”
And he was right. Cash flow is the businesses’ means to pay employee salaries, buy supplies, pay rent, and make investments to multiply its growth. More important than cash flow itself, however, is managing it.
Business owners who cannot efficiently manage their cash flow are almost certain to fail. As cited by PayPie, among failed SMEs (small to medium-sized enterprises), 60% cited cash flow as a cause.
So, what exactly is cash flow, and how do you manage it?
Cash flow is the money that moves (flows) in and out of your business every month. This should be tracked monthly, weekly, or, for some businesses, even daily.
- Cash flows in from clients who are buying your products/services.
- Cash flows out of your business through business expenses like rent, taxes, and supplies.
There are two types of cash flow, positive and negative.
Positive cash flow occurs when the cash flowing into your business from sales, etc. is more than the amount of the cash leaving your business through expenses like salaries and supplies.
Negative cash flow occurs when your outflow of cash (business expenses) is greater than your incoming cash, which is a recipe for bankruptcy and business failure.
Achieving a positive cash flow and establishing effective cash flow management does not happen by accident. It’s a goal that constantly has to be worked on. It encompasses a strict commitment to regularly analyzing and managing your cash flow for both the current month and upcoming month in order to cover your businesses’ financial obligations in the coming month.
Tools for Managing Cash Flow
As a small business owner, there are a plethora of tools available to you in order to track your cash flow.
If you’re looking for tools and templates, check these out:
- The Small Business Administration has a free cash flow worksheet you can use.
- PlanGuru integrates with accounting platforms to provide users with both current cash-flow data and forecasting.
- QuickBooks offers fairly simple cash-flow forecasting. It’s best used for small businesses.
- Google Docs offers several templates built to help small businesses with cash-flow management.
To get a better handle on your cash flow (and other financial indicators), find a simple program/tool within your budget, enter any financial information you have as it pertains to your business. As you become more organized and informed, you’ll be able to properly analyze your cash flow, and understand what needs to change.
If you determine that your cash flow is bordering negative, consider using these tips:
Make it a habit to bargain
Obviously, paying less for materials and services decreases your business expenses, which in turn, increases your cash flow. There is, however, an art to bargaining and negotiating. Check out more info on negotiation in business from Harvard, here.
Create a separate bank account for your business
A separate bank account for business helps you maintain accurate accounting records and tax filings while reducing overspending. Your business bank account statement becomes a crucial tool, as it can be used to track your company’s income, expenses, profitability, and your cash flow!
Invoice quickly and set clear terms
It’s a simple concept—the sooner you send an invoice to a client, the sooner you’ll get paid. Research has shown that 62% of invoices take 60 days or more to be paid, so unless you’re willing to wait over two months to get paid, invoice ASAP and make your payment terms crystal clear.