You’ve heard it before – CASH IS KING! It’s the driving force in every business. If not managed properly, you will be unable to avoid a liquid financial crisis. Cash flow management, while essential for all businesses, is a fundamental pillar specifically for small businesses. Not managing it properly can be detrimental and lead to business failure.
The best way to monitor you cash flow is to maintain a cash flow schedule for a minimum of 12 months. This schedule will show you all of the cash coming into your business and all of the sources it is coming from. You should also list all of the cash going out of your business and who or what expenses you are paying for.
The longer the period you are analyzing the more insight you have. You will also have the flexibility of being able to create various forecasting scenarios. These scenarios will help you determine the best strategy you should use in your business.
Maintaining a cash flow schedule will also help you in other areas of your business. Here are a few:
Identify cash shortfalls. This schedule will double as an early detection warning system in your business. You will be able to see which months your expected cash balance will drop off into the red, and as a result you can either shift your expenses or increase you cash inflow.
Provide a glimpse into your customer’s financial situation. You may be experiencing a great increase in sales but somehow your cash balance is low. Managing you cash flow will give you insight into how your customers are paying. A constant decrease in cash compared to sales says that your customers are not paying and you need to find out why.
Tracking towards your goals. Managing you cash also helps you determine if you are tracking towards your financial goals. Comparing your actual cash inflows and outflows against your projections or goals will allow you to determine areas within your own business that need to be re-strategized.
Do you have a cash flow management system in place? How has creating one helped you gain better control of your finances? What consequences did you have to face when you did not have a cash flow management system in place?
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