Three Steps to Managing Your Business’ Cash Flow
One of the greatest aspects of entrepreneurship is not just establishing your business, but watching it grow.
But business growth is a rocky road that many entrepreneurs are unable to travel. According to the U.S. Bureau of Labor Statistics, only two-thirds of small business will make it past the two year mark; another 44 percent make it to four years and only 31 percent make it to seven years. That’s pretty disheartening news for entrepreneurs who are filled with dreams of building great, long lasting enterprises.
And the reasons small businesses consistently fail? They:
- don’t have not enough experience running a business
- the location is poor, and
- poor management of inventory.
And the biggest reason so many small businesses fail? It boils down to lack of capital. As the saying goes, “in order to stay in business, you have to stay in business.”
If you’re ready for your business to not only grow, but become sustainable, you’ve got to pay attention to your finances. The best place to start is by managing your business’ cash flow. By managing your business’ cash flow, you’ll identify how much money your business is bringing in from customers, your expenses and how you can use business credit to grow your business.
Pay Attention to Your Positive and Negative Cash Flow
As an entrepreneur, it takes a lot of hard to work to achieve a positive cash flow. Your positive cash flow includes not only money that you are bringing into the business through sales, but also what is leftover after expenses have been paid. According to the Small Business Administration (SBA), business owners should be analyzing their cash flow monthly. By doing this, you’ll be making sure that you have enough money to cover your expenses for the months ahead. If you realize that you have a negative cash flow–meaning your are spending more than you are bringing in–you’ll have to make some adjustments to your finances.
Check This Out: The SBA Guide to Managing Your Finances
You can use an accounting software program such as Quickbooks, which is a popular choice for small and medium sized businesses. With an accounting software, you’ll be able to create a cash flow statement that will allow you to see your earnings, expenses and losses.
Understand Your Profit Versus Cash Flow
Being paid for services rendered is just part of understanding your cash flow. Just because you are collecting money doesn’t mean that you’re making a profit in your business. There are other factors to consider. For instance, what’s your inventory? What accounts need to be paid? What financing needs to be repaid? What are (if any) your capital expenditures?
If after all the bills have been paid you have a positive cash flow, then you’ve got profits. But if not, then you’ll need to look carefully at how much money your are generating and where that money is going in your business. By paying attention to your profit versus your cash flow, you’ll be making sure that your business is ready for expansion. If not, you’ll be able to spot where adjustments need to be made to create profit.
Work at Improving Your Cash Flow
If you realize that you are experiencing more financial losses in your business than gains, it’s time to ask yourself some tough questions.
You’ll need to know:
- What is my current cash balance?
- What can I expect my balance to be in six months?
The answers to these questions will illuminate your business’ financial well being and what steps you need to take to fix these problems.
By analyzing your cash flow monthly, you’ll be able to discover the type of cash flow your business truly needs. You’ll also be able to make better projections concerning your business’ cash flow. These honest projections will allow you to make prudent decisions when deciding on expansion and accepting business credit.
Check This Out: Closing Your Business Permanently?
If you want your business to be an entity that can sustain itself in good and bad times, then managing your business’ cash flow is key. By analyzing your financial data on a monthly, quarterly and yearly basis, you’ll be able to understand your profits and losses. Then, you can focus on sustainability, make realistic projections and plan for growth.