Better Managing Cash Flow
Trying to run a business without managing cash flow is like trying to paddle a boat without an oar. Even if you succeed, it will be an upstream exercise guaranteed to wear you out.
Cash flow is important for all businesses, but it is critical for early startups. If you cannot manage your cash flow within the first year, you will likely not survive the second year.
The three key elements of your cash flow analysis include:
- Accounts receivable: What customers and clients owe you.
- Accounts payable: What you owe your suppliers.
- Shortfalls: You hope not to have these, but they do happen (see #3).
You must effectively manage all three if you want to navigate your business to success. Of course, the best direction to paddle a canoe is with the current. You’ll go faster and won’t wear yourself out. By the same token, your business will be healthier if you manage your cash flow toward the profit line. Here are a few tips to help you row your cash flow boat successfully:
1. Determine Your Breakeven Point
You should know when your business will become profitable, not because it will affect your cash flow — because it won’t — but because it gives you an early goal to strive for and a ready-made target for projecting future cash flow. Negative cash flow and negative profits make for a grim combination. Focus your efforts on managing your cash flow with an eye toward reaching that moment when you realize your first profits.
2. Focus on Cash Flow Management, not Profits
This may sound contradictory to #1, but it’s not. Use your breakeven point as a benchmark. After you reach breakeven and your business is profitable, you still need to manage your cash flow, of course. You have reached another stage of your business’s life.
3. Maintain Some Cash Reserves
You will have cash shortfalls. Your business’s very survival may depend on how you maneuver through those shortfalls. If you start with some cash in your bank account, it will be easier to focus on cash flow and you won’t stress about the shortfalls.
4. Use a Cash Flow Worksheet
SCORE has a template in Excel format you can use on its website.
5. Collect Receivables ASAP
Keep net-30 and net-60 terms in contracts to a minimum. If necessary, delegate the task of keeping an eye on receivables and contacting customers periodically to collect payment to a trustworthy, persistent member of your team.
As long as your cash flow stays positive, your business can survive turbulent waters. Project future cash flows based on history and sound financial data. It takes the guesswork out of it, and you’ll sleep better at night.