21.2.17 – The Importance of Managing Your Cash Flow
People have a way of forgetting that cash flow involves a whole lot more than just money coming into your business. In many ways, it’s a crystal ball that lets you see into the future. If you know where you want to be, cash flow is the pivotal road map that lets you know how you’re going to get there, and unfortunately, for many, it’s a huge problem. According to one study, an incredible 82% of all businesses that failed cite cash flow problems as the number one reason for stunting growth.
Cash flow can create a perfect storm of problems, a snowball that just gets bigger and bigger over time. The most immediate problem is that you can’t pay your bills, which means that you can’t grow your business either. You may have to use loans to keep things afloat, which isn’t solving your problem — just moving it farther down the line. These things add up, but luckily, there are also solutions you can start using today to help keep things under control.
Your cash flow forecast
In order to properly address a problem, you have to understand how deep that problem runs. Create a cash flow forecast, which is essentially a schedule of all the incoming payments you can expect for the next few months. Then plan your outgoing payments to match them. This will give you a macro look at exactly the situation you’re looking at.
This advice may seem simple, but it’s also mission-critical: send out your invoices as promptly as possible every time, all the time. Remember that the sooner invoices are sent out, the sooner they’ll be paid. It’s a simple rule, but in a situation where literally every cent counts, it can make a big impact.
It’s also important to do your due diligence and check credit ratings before you make a sale. Make customer research a standard part of your process. Set a credit limit for potential customers, and no matter what, stick with it. Don’t accept customers that don’t meet the criteria, no matter how nice they may seem. Remember, your business comes first.
The power of invoice financing
In terms of outstanding invoices — which is a problem that will likely never truly go away — partner with an invoice financing company who will buy that invoice from you. This is called invoice financing. Many use this as a form of business protection insurance — thanks largely to the fact that it doesn’t just work, it works wonders. Not only does this get you the cash you need today, but it will also free up valuable time so that you don’t have to spend it chasing down clients yourself.
Watch those expenses
Another important step you’ll want to take involves eliminating any and all expenses that are just too high given your current situation. Take a long hard look at every expense that you have. Separate them into two categories — the ones that your business cannot survive without and the ones that it likely can. Order them based on size, with the biggest expense obviously at the top of each column.
This accomplishes two things. First, it gives you an important insight into exactly how you’re spending money and why. Secondly, you can easily see the biggest expenses that may be nice but that aren’t necessarily required to keep the lights on or the doors open. Focus on reducing or outright eliminating those expenses first to help get rid of waste and solve your problem.
Look to the future
To say that fluctuating cash flow can be a problem for most small businesses in particular is something of an understatement. Steadying it shouldn’t just be your number one priority today — you should be as proactive as possible to help guarantee you don’t find yourself in a similar situation again in the future. Take these steps today so that you don’t pay for them tomorrow — literally.