The vast majority of businesses fail due to poorly managed cash flow. The only way to stop this from happening, and to enable more deserving business owners to succeed, is to upskill and educate ourselves and our communities on effective cash flow management. This involves planning ahead, arranging for borrowing and monitoring your money.
In this article, we’ll take a deep dive into what cash flow management is, why it’s important and how to master it as a key business skill in order to achieve success.
Why Cash Flow Is Important
Cash flow is the money currently moving through your business, as opposed to future money from accounts receivable. Think of it as “in hand” money. Could you cover your expenses with what is currently in your account? If the answer is yes, you have a positive cash flow. If not, you are experiencing negative cash flow.
The importance of cash flow management comes down to timing and planning. It is vital to forecast your cash flow as far into the future as possible, so you can plan accordingly. What does your inflow (e.g., accounts receivable, revenue, etc.) look like in relation to your outflow (e.g., expenses, accounts payable, etc.). Can you forecast two, three or even six months from now?
For example, when you invoice a client, that money is only “in hand” when they have paid you and your bank has received that payment. Until then, what is your cash flow strategy? Can you invoice clients earlier to ensure your expenses are covered at the correct time? Do you have alternate streams of income that can tide you over? Do you have access to an overdraft facility or another loan facility to bridge the cash flow gap? What is the plan? If you don’t have one, read on.
Three Tips For Managing Cash Flow
Now that the importance of cash flow has been defined, it’s time to look at what you can do to improve your cash flow management.
1. Plan In Advance
Budget, budget, budget! Forecast your monthly expenses and revenue as accurately as possible. This means examining your invoices monthly and sending them out at the right time to ensure there is always cash on hand to cover your monthly expenses.
This may require conversations with your clients to arrange an earlier payment date for some and a later date for others. Depending on the type of work, clients could be invoiced on an “upon completion” basis instead of monthly. The same can be said for expenses: Negotiating payment plans, custom payment dates or flexible terms with suppliers can make all the difference between a positive and negative cash flow month.
2. Arrange For The Ability To Borrow Money Before It’s Urgent
You may not want to borrow money from creditors before you absolutely need it, as that can be expensive. But realistically, as a business owner, it’s important to be aware that at some point you may need to. It’s vital to have a good understanding of your cash flow, inflows and outflows, so that you can predict when you may need to borrow money and arrange for it before it’s urgent or too late.
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