Small businesses must learn how to manage cash flow, which is the lifeline of the business. A cash crunch can stifle your business as it prevents you from buying materials, paying suppliers, and even paying salaries. The problem arises from the time gap between the time you need to pay your suppliers and the time you receive your customers’ payment. To overcome the problem, Robert Trosten suggests that you must learn cash flow management and maintain a working capital that allows you to tide over the difficult times and continue with business operations.
But before you delve into the strategies to maintain and improve cash flow that keeps your business in good health, you must be familiar with the basics of cash flow management.
Profit does not indicate good cash flow says Robert Trosten
There is a notion among many people that profit-making businesses are most likely to have proper cash flow management. This is far from the truth because there is no direct relation between profit and cash flow. In addition to the Profit & Loss statement, you must look at many other financial figures to get a hold of your cash flow. You must consider accounts receivables, accounts payable, inventory, capital expenditures, and taxation. Simply said, you must consider all the outlets through which cash can flow out. Monitoring all these factors meticulously is part of effective cash management, and focusing only on profit can never reveal the state of cash flow. Earning profit does not have any relation to what happens to your cash.
Determine the breakeven point
Determining when your business becomes profitable is crucial because it becomes the early goal that you must strive for and use it to project future cash flow. Avoid negative cash flow at all costs because combined with negative profit, it can spell disaster for your business. Manage your cash flow in a way so that you can quickly reach the point of achieving your first profits. Doing a breakeven analysis based on data gathered about income and expenses should help.
To have a grip on your cash flow and formulate suitable strategies to maintain it well, you must have all financial data readily available at any point in time to make well-informed decisions. As told earlier, the first step is to find out the working capital that your business requires for which you must gather data from various areas of business operations like accounts payable, accounts receivable, work-in-progress, inventory, etc.
You must determine the amount of inventory you need to hold, the amount of overdue invoices, the amount of work-in-progress which is equivalent to cash, and the time lag between the time you receive payments from your customers and the time you pay your suppliers.
The most critical aspect of cash flow management is to anticipate inflows and outflows of cash over a specific time, and you must have systems in place to measure the key metrics. Tour accountants and bookkeepers are the go-to persons to help you in proper cash flow management.