3 Essential Cash Flow Management Tips for Your Business
In the business world, cash flow management is vital to reaching profitability.
Surprisingly, many entrepreneurs don't seem to be aware of this simple fact. They don't take any steps to manage their cash flow, which usually leaves them with an empty bank account.
The good news: you can remedy this in no time.
Why is managing cash flow so important? For starters, it helps you prepare a financial plan for slower periods. You'd be surprised how much peace of mind you get from being able to control your cash flow. What should you know about this business process? The following 3 tips should be a good start.
1. Create a Cash Flow Projection
The very first thing you should do is prepare a cash flow projection for the upcoming year. This helps you identify potential issues in your long-term plans.
As for how to go about it, you've got two options: you can use accounting software or an Excel spreadsheet. Both allow you to fill in expected cash inflow and outflow on a monthly basis. Noting costly purchases is particularly important.
Once you've finished the projection, use it to prepare for the slower periods. Comparing your cash position against your projection is a great way to check how you're doing. You should do this once per week or month.
2. Check Your Fundamentals
If you're looking into how to manage cash flow, make sure that your business is earning a decent profit.
Among other things, this means analyzing your products and services separately. You should try to cut any inefficiencies and price each product appropriately. This will help you turn your sales into profitable sales.
For example, let's assume you're facing a large cost overrun on one of your projects. To restore your cash position, ensure that your prices are reflecting the costs. Unloading low-margin product lines can help with tightening your cash flow.
If these changes don't produce the desired impact, just keep trying. Remember, your main goal should be to produce higher profit margins. Most of the time, this means being ahead of the curve with your money management.
3. Finance Big Purchases
When buying major long-term assets, many entrepreneurs opt for paying in cash instead of getting financing. Most of the time, this will turn out to be a mistake.
Why? Well, it's all about preparing for sudden growth or revenue shortfall. Even if you have enough cash right now, you never know when something unexpected will happen.
You can use your cash flow projection for planning your financing needs. If you try to get financing in the midst of a crisis, you may struggle to find a suitor. Also, try matching the duration of your financing with the lifespan of your purchase.
More on Cash Flow Management
As you can see, managing cash flow is not a walk in the park. Other than these 3 tips above, entrepreneurs should know how to speed up cash inflow and raise money in a crunch.
Need some additional advice on cash flow management? We at Catalyst Business Services may be able to help you out. Contact us right here, and we'll get back to you soon.
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