Running a business is hard work. You need to set goals, establish and maintain a relationship with a coach, track profits, losses, and — yes — understand cash flow.
But what exactly is cash flow and how can you go about maintaining a healthy one?
Here’s a primer on cash flow: what it is, what it isn’t, and how you can better manage it.
What is cash flow?
In a nutshell, cash flow is the movement of funds in and out of a business. It’s usually tracked either weekly, monthly, or quarterly.
There are two kinds of cash flow:
Positive cash flow
This occurs when your incoming cash is more than the amount of cash leaving your business. It means your income from sales, accounts receivable, etc., outstrips your expenses such as employee salaries, monthly expenses, accounts payable, etc.
Negative cash flow
Negative cash flow occurs when a business’s outflow of cash is greater than its incoming cash. As you can imagine, it generally spells trouble for a business.
Identifying your cash flow is one of the best ways to snapshot the health of your business.
– Regularly making more than you’re spending? No problems.
– Cash flow edging into the negative? You might have a problem.
Profit doesn’t equal healthy cash flow
You can’t look at your profit and loss statement and get a snapshot of your cash flow. Cash flow takes into account many financial figures that profit and loss statements don’t, including:
● Accounts receivable ● Inventory ● Accounts payable ● Capital expenditures ● Taxation
Proper cash flow management requires a particular focus on each of these factors in addition to a business’s profit and loss. Getting the two mixed up is a quick way to confuse your strategizing and sink your business.
Five rules for managing your cash flow
Now you know what cash flow is (and isn’t) let’s take a look at some ways you can maintain a healthy cash flow.
Keep your books up to date
Your cash flow will only ever be as good as your accounting and reporting. It’s essential, then, that you stay on top of your books. Make sure your accounting information is kept up to date and ensure your books are accurate. Your cash flow management will thank you.
Don’t be too soft with customers
Maintaining a direct, fair invoicing strategy is essential to the smooth running of a business. Keep a close eye on your accounts receivable turnover and watch for upwards trends. If you notice any spikes, it may be time to step up your efforts at chasing payment.
Keep your accounting simple
Don’t try to do everything yourself. Make use of quality accounting software and automate where possible. If in doubt, hire a professional.
Keep your personal and business finances separate
Lumping your business and personal finances together is a quick way to confuse yourself. By separating them you’ll be better able to understand your business’s cash flow and forecast how it might change.
This is where creating an LLC can be beneficial. It ensures your business and personal finances are kept separate and, as a bonus, protects your personal assets from troubles related to your business.
Build a cash reserve
Access to cash makes or breaks a business. This is why the pros all recommend building a cash reserve.
A cash reserve acts as a cushion when your business is faced with an unexpected event. It also lets you better take advantage of opportunities when they present themselves.
Manage your cash flow like a pro.
Managing your cash flow is one of the best things you can do for the success of your business. It gives you essential metrics required for business strategizing. Work with a coach to keep your motivation high and your sights set on your goals.