How managing Cash Flow works to keep your Business going – plus keep it Growing !!!
Topics: What is CF? Why, when Starting, How to Analyze, Resolving Issues, Manage your $$$, Budget, Line of Credit, Short-term Loans, Trade Credit Additional Revenue Streams, Employee Issues,
1. What is Cash Flow? It’s the money that is moving (flowing) into and out of your business over a period of time.
- Cash is coming in from Customers and/or Clients who are buying your products or services. If customers don’t pay at time of purchase, some of your Cash Flow is coming from collections of Accounts Receivable.
- Cash is going out of your business in the form of payments for expenses, (ie, rent, loan payments, wages, payments for taxes & other Accounts Payable.
Think of ‘Cash Flow’ as a picture of your Business Checking account If more money is coming in than is going out, you are in a “positive (+) Cash Flow” situation and you have enough to pay your expenses. If more cash is going out than coming in (a “negative (-) Cash Flow”), you are in danger of being over-drawn, and you will need to find money to cover your over-drafts. This is why new businesses typically need working capital, in the form of a Loan or Line of Credit, to cover shortages in Cash Flow – which may occur from time to time – due to monthly fluctuations in Cash Flow.
2. Why Cash Flow is So Important. Lack of Cash is one of the biggest reasons small businesses fail. The Small Business Administration (SBA) says that “inadequate cash reserves” are a top reason startups don’t succeed and may shut you down faster than anything else.
3. Cash Flow when Starting a Business. Dealing with Cash Flow issues is most difficult when you are starting a business. You have many expenses (ie, development) that going out fast. And you may have few or no sales or Customers who are paying you immediately. You will need some other temporary sources of cash, (ie, a temporary Line of Credit), to help you with startup costs, until you hit “break even” and a positive (+) Cash Flow situation.
4. How to Analyze Cash Flow.
Software. The best way to keep track of Cash Flow in your business is to have a Cash Flow analysis Software (“free” MyCashFlow, Chartio, PlanWare, etc + low to medium cost SW) Do your “research” to determine what meets your need and is easy to use.
A Cash Flow statement looks at the change to cash (in this case, your business checking account), from different business activities and increases or decreases in other accounts on your business Balance sheet.
- What happens to the Cash Flow when a Customer pays their bill?
- What happens to Cash Flow if you buy Equipment?
- What happens to Cash Flow if you pay an Employee or another business to do work for you?
- What about your monthly Overhead?
Usually, you keep analyze Cash Flow monthly, but at critical times, you may need to on a weekly or more frequent basis.
Accounting Software may have a Cash Flow statement as one of the standard reports, your accountant can run it for you or use one of the Cash Flow mentioned above
5. Ways to resolve the “issues” created by your Cash Flow “roller coaster”
5a. Manage your Money. Sure, you must pay ordinary Expenses each month, overhead (ie, rent & utilities, and special Expenses (overtime, travel to shows) Resist the urge to spend on big-ticket items that can be put off. Putting excess cash into a savings account or money market fund for the lean times can help you avoid having to borrow during those times. Simply put, damn, “DSATM; Don’t Spend All the Money” !!!
5b. Create & use a Business Budget. If your Cash Flow situation is cyclical, create a yearly budget to see how much cash you will need each month to pay recurring bills, then build in that savings from the higher cash months to see how much you will need. A budget is especially necessary for a startup, and a pro forma (projected) budget will be required for a startup business to receive financing.
5c. Get a “Line of Credit”. Another solution to Cash Flow lows is to work with a local bank to set up a Line of Credit – sometimes called “working capital” credit lines. These loans put money into your checking account to use when you need it, and you can pay back as you get funds later.
5d. CAPLine Short-term Loans through the SBA help small businesses meet short-term & cyclical “working capital” needs. CAPLine Loans are available for contracts, seasonal builders, & other working capital situations.
5e. Negotiate with Vendors to get Trade Credit. Developing a good relationship with Vendors (outside services), and asking them to work with on repayment of their bills, can help with Cash Flow. Trade Credit (paying the Vendor, after the product is bought), is essentially asking your suppliers to help finance your business, so you will need to put them at the top of the list to be repaid when cash is coming in from customers.
5f. Find Additional Revenue Streams. Brain Storm with your Team, to come up with new ideas for distribution channels or new products/services that can pick up the slack during those low Cash months.
5g. Employee Issues in (-) Cash Flow (CF) Fluctuations. Let employees know of your situation. If they understand the situation and know you are trying to bring in new cash, they may be more willing to take extra days off or temporary pay-cuts to survive. Especially, if you promise to restore the pay-cuts or give them a Bonus after a period of +CF.
Comments: Do you know anything else that will help Cash Flow?
from Balance-your-Books 16 Dec 16 enhanced by Peter/CXO Wiz4biz