Maintaining a healthy cash flow is essential for the success of any business. Cash flow problems can be extremely crippling and can even lead to businesses going bankrupt. According to research, cash flow is the number one reason businesses fail and accounts for about 82% of startup failures.
So, what can you do to avoid being one of them? There are several different cash flow strategies that businesses can use to manage their cash flow more effectively.
Below are eight easy steps on how to manage cash flow properly for optimum financial management.
1. Understand Your Business’s Cash Flow Cycle
Your business’s cash flow cycle is the time it takes to turn your inventory into cash. This is an important number to know because it will help you manage your cash flow. If you have a lot of inventory but it takes a long time to sell, then you need to have enough cash on hand to cover the cost of the inventory.
If you have a lot of debt, you need to make sure that you’re making enough money to cover your debt payments. You can use a cash flow statement to track your business’s cash flow cycle. This will give you a good idea of where your money is going and how much cash you have on hand.
2. Know Your Seasonality
If your business is seasonal, you need to plan for the times when cash flow is low. For example, if you’re in the retail business, you know that sales are slow in January and February but pick up around Easter.
You should plan ahead by borrowing money or using credit lines during the slower months to cover expenses, knowing that you’ll have more cash coming in during the busier months.
3. Know Your Burn Rate
Your burn rate is the amount of cash you are spending each month. To calculate your burn rate, take your total monthly expenses and divide them by your total monthly revenue.
For example, if your monthly expenses are $50,000 and your monthly revenue is $100,000, your burn rate is 50%.
It’s important to know your burn rate as it’ll help you manage your cash flow. If your burn rate is too high, you’re spending more money than you are bringing in, and you’ll eventually run out of cash. On the other hand, if your burn rate is too low, it could mean you’re not investing enough in your business to grow.
The goal is to find a happy medium — a burn rate that allows you to invest in your business while also keeping enough cash on hand to cover your expenses.
4. Make a Budget
A budget will help you track your income and expenses so you can ensure you’re making more money than you are spending. A budget will also help you find ways to save money to increase your cash flow.
There are a few different ways to make a budget. You can use a software program like Quicken or Mint or use a spreadsheet program like Microsoft Excel. You can also find budget templates online that you can customize to fit your business.
Once you have your budget set up, make sure that you review it regularly and make changes as necessary. This will help you keep on track and ensure that your cash flow is where you want it to be.
5. Know Your Breakeven Point
Your business’s breakeven point is the number of sales you need to make to cover your costs. If you are not making enough sales to cover your costs, you need to find a way to increase your sales or reduce your costs.
You can use breakeven analysis to calculate your business’s breakeven point. This will give you a good idea of how many sales you need to make to cover your costs.
A business has a lot of expenses, such as the cost of inventory, the cost of rent, the cost of salaries, and the cost of marketing. To manage cash flow properly, you need to know how much sales you need to make to cover all of your expenses. Use your cash-flow statements to track your business’s cash flow.
6. Know Your Cash-Flow Sources
Every business has two types of cash flow: operating and financing. Operating cash flow comes from your business’s day-to-day activities, such as making sales and paying expenses. Financing cash flow comes from outside sources, such as loans or investments.
You need to know where your cash is coming from so you can manage it properly. If most of your cash flow is coming from loans, you need to make sure you’re using that money wisely and not taking on more debt than you can handle.
If you’re relying on investments, you need to be aware of the risk involved. Investments can give you a great return, but they can also lose money. You need to be prepared for the possibility of a loss and have a plan to manage it if it does happen.
7. Know When You Have a Negative Cash Flow
A negative cash flow occurs when your business doesn’t have enough cash to meet its financial goals and obligations. This can happen for some reasons, such as if you haven’t collected payments from customers yet or if you’ve made a large purchase that you haven’t been able to sell yet.
If you have a negative cash flow, it’s crucial to take action quickly to correct it. You can do this by taking out a loan, line of credit or short-term financing. You may also want to consider invoice factoring, which is when you sell your unpaid invoices to a third party for a fee.
8. Make a Cash-flow Projection
A cash-flow projection estimates the future inflows and outflows of cash for your business.
To create one, start by looking at your sales projections for the upcoming months and years. Then, account for any other sources or uses of cash that you anticipate, such as investing in new equipment or taking out a loan.
Your cash-flow projection will help you identify potential cash-flow problems before they happen so that you can take steps to avoid them. For example, if you see that your projection shows that you’ll have a negative cash balance in six months, you can take steps now to increase your sales or reduce your expenses.
Keep in mind that your cash-flow projection is an estimate, and it’s important to revise it regularly as your business’s circumstances change.
How to Manage Cash Flow: A Guide
There you have it! These are some of the best cash flow strategies you need to manage cash flow is an integral part of running a successful business. By following these eight tips, you can ensure that your business has the cash it needs to meet its financial obligations and grow.
If you find that cash flow management is not your forte, or you’re too busy to keep track, please get in touch with us. We have professionals who’ll take care of your bookkeeping needs and tax planning for your business.