When it comes to running a business of any size, managing cash flow is critical. Managing a small business without a cash flow forecast is similar to driving at night with sunglasses on. You might be moving in the right direction, but for how long?
So what is cash flow exactly? Why is it important for your business? And how can you ensure that it is managed successfully?
Put simply, cash flow is the moving of money in and out of your business. Cash flow comes in from customers who are purchasing your goods or services, money from investors, investments and so on. Cash flow comes out from wages, rent, payments, taxes etc. A positive cash flow means you have more cash coming into your business that there is flowing out. Negative cash flow means there is more cash flowing out rather than in.
For businesses, cash flow is critical as it offers the cash required to pay salaries, pay vendors, invest in growth plans, and keep your company running. Having appropriate cash flow can assist when you are:
Starting A Business:
When a business first opens its doors, it typically has a significant amount of expenses that are necessary to get the company off the ground. Being brand new, it generally does not have sufficient sales to support the cash flow that is going out. This is where a business loan may be able to assist in the meantime.
Growing A Business:
Having the required cash readily available when you want to take the next step in your business growth will enable you to operate both strategically and proactively. A positive cash flow enables the freedom to invest in growth strategies such as research/development, buying/expanding, purchasing new assets, and improved technology just to name a few.
Managing A Business:
There are many benefits of understanding your businesses cash flow. Being able to do this will allow you to effectively understand cash and liquidity for better decision making, understand lending requirements, enables you to plan for large cash flows, understand key cashflow drivers and the cash conversion cycle in your business etc.
Below are some steps that can be taken to improve cash flow and keep that money flowing into your business.
Nail Your Record Keeping
The key here is to plan accurate, up to date figures. Reconcile at least twice a week. This will ensure you are getting the clearest picture of your cash flow situation and are making the most of your accounting software.
Invoice Early And Often
Clients will rarely pay until they are actually invoiced. Have the invoice ready and prepared to send as soon as the work is complete, or the product has been shipped. Get money in the business sooner rather than later.
Control Spending And Shop Around
This is hugely important in the early days of your business. Have you shopped around for the cheapest providers you need? By focusing on the essentials this will control costs and allow you to keep hold of your cash.
Smart Digital Products Can Help
You know what can be your best friend? Accurate, reliable financial forecasting information. By investing in some good business accounting software, it will take the guesswork out of cash flow planning.
The City of Perth Small Business Quick Response Grant is currently available to eligible businesses to assist in various initiatives including bringing new offerings or experiences to the city and assisting businesses with marketing and professional service support. Grants of up to $5,000 are available. Contact the Business Development team on 9461 3333.
The City of Perth is offering a free confidential business advisory service with a qualified business advisor from Business Foundations. The service includes 3x 1-hour sessions with a focus on tactical information and advice on a range of topics including;
If you are interested in taking up this offer get in touch with Business Foundations.
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