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The life of an entrepreneur can be a rather challenging one, as you strive to build your business and deal with a variety of concerns that you perhaps never anticipated. One of those concerns is likely to be cash flow management.
The success of your business will be highly dependent on your ability to understand cash flow, but unfortunately, many entrepreneurs are not very familiar with accounting, and very rarely do they have much in the way of a financial background. This is one reason why so many organizations find themselves in a difficult financial position at some point.
These difficulties can be overcome with good financial management and proper strategies. Below we will look at some ways that entrepreneurs can overcome cash flow challenges.
BEGIN WITH THE BASICS
You should definitely have some understanding of cash flow and what it means to the success of your company. A cash flow statement is essentially like your personal bank account statement—just as your bank book shows deposits and withdrawals in your account, a cash flow statement demonstrates the flow of money for your business. The net cash flow is equivalent to the running balance of your bank account.
A cash flow statement shows all of the cash flows that occurred during a particular period. A cash flow budget is a projection of future deposits and withdrawals. The statement involves more than just the tracking of money moving in and out of your business, it also examines the timing of the cash flows to forecast your monthly cash balance and the anticipated balance at the end of the year.
Another aspect of cash flow analysis is working capital, which is the amount of money you need to continue operations. This is calculated by subtracting your current liabilities from your current assets to determine the liquidity of your business over a future period of time.
Once you have determined your working capital, if it seems adequate for your needs, you may not need to immediately create a cash flow budget, but if the amount is not adequate, creating a budget may help to predict liquidity problems that might arise over the course of the coming year.
If this seems confusing or a bit daunting, you might see the reason for hiring a CPA or CFO, who will be able to interpret your financial information. What you should understand, however, is how to read cash flow statements and balance sheets, which will allow you to make decisions accordingly.
TRACK YOUR REVENUE
It is vital for your cash flow statement to be able to forecast revenue. Fluctuations such as seasonal changes should be watched carefully, as they could result in difficulties later. For example, if your company is earning the bulk of its revenue during a particular period of the year, you will need to know how to manage your resources carefully throughout the rest of the year in order to avoid problems with cash flow.
WATCH YOUR EXPENDITURES
You need to monitor your spending and it is important that you differentiate between discretionary and non-discretionary spending. This will often be pretty simple, with things such as rent and wages, but it is sometimes a bit less clear when it comes to advertising, promotions, or expenses related to wining and dining a potential client.
Create a marketing plan. Determine who your target audience is and create a strategy to reach them in the most effective manner available to you, while taking into account budgetary constraints. Set some goals and know your expectations for your marketing so that you will be able to measure its efficacy. This will let you turn a discretionary expenditure into an important part of building your business.
YOUR RECEIVABLES NEED TO BE COLLECTED
Late payments and the need for collections are pretty standard. In fact, for every 10 new customers that you acquire, on average 2 will pay late and another 2 will end up being sent to collections. This results in up to 40% of your new clients negatively impacting your cash flow, so it is very important to follow up on your invoicing and collections. Some ways to do this include:
- Checking the references (at least 3) of each new client.
- Defining the minimum order that will require a credit check.
- Being familiar with the customer’s credit history. Do not offer credit to anyone that you are not certain is capable of repayment. Take deposits from new customers.
- Be aware of what credit terms you are offering. An easy means of collecting if you are a custom manufacturer for example, is to require a payment of 50% before you begin work, 40% before delivery, and the final 10% after delivery.
- Invoice within 24 to 48 hours and always confirm the accuracy of invoices and payment terms.
The best thing that you can do, however, is simply continue monitoring your finances and work closely with your financial team. Cash flow challenges can appear at any time, so it is in your best interest to understand all the tools that can help you spot difficulties before they arrive.
***This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is subject to change without notice.