Cash flow activity is crucial for the long-term survival of early phase businesses and established businesses. Poor attention to cash flow can bankrupt a profitable business.
For example, you may find yourself in a position where you sold a lot of inventory. While you wait for payment on that inventory, your inventory supplier expects payment now. Despite the fact that you’re profitable on paper, you can’t pay your bills.
Understanding where your cash comes from and when, as well as where it goes and when, can mean the difference between success and bankruptcy. So, here are five tips for staying on top of your cash flow.
1. Invoice Promptly
You must invoice as soon as you make your sales. It’s simply too easy for that step to get lost in the shuffle. Let’s say you give your customers a 60-day payment window. If you don’t invoice for a month, you effectively extend their payment window.
That can leave you waiting on the money you need for overhead, payroll, and supplier payments.
2. Do Projections
Cash flow projections are an informed best guess about your cash flow will look in the near to mid-term future. You should base these projections on your current sales, recurring orders, accounts receivables, and historical data.
This combination of information gives a fairly reliable look at your potential cash flow activity. It can also warn you about potential cash crunches based on lost clients or seasonal factors. If you’re not comfortable making these calculations yourself, you can use a service for cash flow management projections.
3. Review Your Expenses
Don’t assume your expenses all make sense. Expenses often expand in step with available money.
While you don’t need a quarterly review of your expenses, you should review them at least once or twice every year. If you’ve expanded recently, see if you can renegotiate terms based on your expanded needs.
4. Digitize Processes
Look for ways you can digitize financial processes. Not only will this help you more efficiently track cash flow, but it will also typically speed up essential processes like invoicing. After all, if you can invoice from your smartphone, you’re less likely to put it off.
5. Leverage Debt
Debt always represents a risk for any business, but it can help you manage cash flow. For example, your bank might provide a revolving line of credit for making your payroll. This relieves a little pressure and lets you hang onto liquid assets when you may need them.
Don’t Take Your Eye Off of Cash Flow Activity
Cash flow activity will, quite literally, decide if your business lives or dies. You must keep a clear eye on that activity and stay ready to make adjustments.
That means you need cash flow projections, an efficient invoicing system, and digitized processes where appropriate. You can even outsource those projections if you don’t feel confident in your own calculations.
Looking for more financial advice for your business or personal life? Take a look at some of the other great articles on our site.