Author: SBR
If cash flow is the lifeblood of a business, the failure to manage it properly is likely to lead to cardiac arrest. For growing businesses, it's not enough to simply track cash flowing into and out of the business checking account. There are many variables to manage which can impact current and future cash flow and, ultimately, the stability of the business. Regardless of which stage your business is in, these are five essentials for successful cash flow management.
- Know your business
- Anticipate the future
- Question everything
- Be aware of the pitfalls
- You don't need to go it alone
Know your business
Business owners need to constantly have their finger on the pulse of their business to clearly understand its current needs while forecasting future trends. However, even the best forecasters can't account for the unexpected that can impact the trajectory of a business, such as an abrupt market downturn or a new competitor with disruptive technology.
The most effective way to avoid an unexpected cash crunch is to thoroughly know your business and all aspects that can impact its cash flow at any time. That includes understanding your business cycles, financing needs, debt costs, expense variances, vendors, and suppliers – any of which could impact your cash flow at any given time.
Anticipate the future
A growing business typically crosses critical junctures as it transitions from one stage to the next. While it's always important to maintain a firm grasp of your available cash as the business transitions, it is critically important to anticipate future spending needs as the business expands. At a minimum, you need to maintain a 12-month cash flow forecast to assess your business's current health and evaluate future cash flow needs.
Question everything
Question your manager's and your own forecasts, especially as they relate to sales and expenses. Forecasts are only as good as the assumptions, and a bad one can have a multiplier effect on your projections. It's better to underestimate inflows and overestimate outflows, which is why it's essential to review monthly cash flow projections.
Be Aware of Pitfalls
Delinquent receivables and early payables are among the common pitfalls plaguing a small business' cash flow. These can be avoided by installing systems to track both to optimize their timeliness. Accelerate receivables by enhancing collection techniques and moving to electronic transfer. Payments should be managed, so they don't leave the business until the last possible moment, preferably by electronic transfer. And, where possible, they should be stretched by renegotiating with vendors.
You don't need to go it alone
Cash flow management could be as simple as recording inflow and outflows and then tracking them into the future. In fact, for a new business with few cash-paying customers, that will probably suffice. To improve cash flow or adjust for changing circumstances, it may be no more involved than lower expenses or finding more revenue. But as businesses grow, more variables enter the picture rendering simple methods ineffective.
The digital age has ushered in new technologies that can bring large-scale cash management solutions to small businesses. Mechanics Bank can be a valuable source of automated cash management solutions. With the ability to manage cash flow functions online, small business owners suddenly have a level of control over their cash flow management that was unheard of just a few years ago.