Trying to run a business without sufficient cash is like trying to drive a car with little fuel.
You won’t go far.
Cash flow is the fuel that keeps your business running. Having a “full tank” of cash on hand will allow you to pay employees and suppliers and plow more money back to your company. Lack of cash can mean the beginning of the end for your business. As a business owner, you’re responsible for your company’s cash flow. Here are four tips to help you understand and manage your cash flow:
Monitor Your Cash Flow
Cash flow refers to the movement of money in and out of your business; a cash flow statement will show you the movement of money coming in and going out over time. Forecasting your cash flow is usually done annually and divided into months. Make sure to keep track of the money that is expected to be spent or received each month.
You can use a cash flow template to make your forecast and record the following amounts monthly:
- Opening Balance: Cash available at the beginning of the month
- Cash Inflow: Record of all funding, loans, and revenue.
- Cash Outflow: Record of all expenditures like purchases, payments, salaries, and so on.
- Net Cash Flow: Deduct the cost of total outflows from the total inflows to see if how much money was saved or spent.
- Closing Balance: Add the net cash flow to the opening balance. This will become your opening balance for the coming month.
Make Cash Flow Projections
It’s important to make cash flow projections to ensure that your business has enough to survive. Your cash flow forecast as your warning system — it will help you identify potential losses, spot problems, and lets you see if you can afford to pay employees and suppliers on time.
Manage Your Burn Rate
You also need to get a handle on your expenses or “burn rate.” This is the total amount of money you spend each month to keep your business running. Depending on your capital, your burn rate will tell you how long your business can last. For example, if you spend $5,000 a month to run your business and have $50,000 in capital, then your business can survive for 10 months even if you’re in the red. There are three things you can do to manage your burn rate: you can increase revenue, raise more funding, and reduce your expenses.
Send an invoice right after the work is completed and set clear payment terms. The sooner you send it, the sooner you’ll get paid. To be able to manage your cash flow, you will need an efficient invoicing process in place.
Lastly, be smart and frugal. Spend only on essentials until you’re profitable and avoid unnecessary expenses. Keeping your cash flow healthy is one of the most important things you can do to grow your business.
Until next time,