Why is cash flow so critical to the business?
Monitoring cash flow is like having a health check for your business. Most small business failures are due to the lack of cash flow management. Do you have to understand what cash flow is? How does it work? How do we apply that to our business? It is also vital to know how cash flow is calculated.
What is cash flow?
It is a cash flow into the business; that is how the money comes in and goes out. It means positive cash flow if you get more money coming into the market than the money goes out. You will be able to pay your bills and invest the rest of the money in the growth of your business. If the money comes in less than the money goes out, you have a negative cash flow. In that case, you will find it difficult to pay the bills. It is where you need to manage it. You must analyze your expenses where the money goes out and control it wherever possible. When you cut down your costs, your cash flow will improve, and you must maintain that.
How do you calculate your net cash flow?
I am sure you must know your total daily sales by now. To check your cash flow every week, you need to calculate the total of all your weekly sales. In the same way, you have to add up all your purchase receipts and get the sum to spend for a week. If the total sales exceed the total purchases, you have done well for that week. Then continue the monitoring every week to keep your expenses under control. Then you can also find ways of improving your sales to bring in more money. You might have thought you were doing well with the sales; managing cash flow would have shown you the reality. You have to go on checking for at least three months to make sure cash flow is under control.
What will happen if there is no cash flow management?
If cash is not maintained, it could lead to many problems, and I will show you some of them here.
Too much stock
When you are doing well with the sales, you might spend your money buying too much inventory. The reason for that is your thought that your product has a significant demand. What happens if your customers find a different product type and move away from you? You will have too much stock and a hefty bill from your supplier.
You need to have proper credit terms.
If you are selling goods on credit, make sure your customers pay their bills on time. Another point is that you have to be careful in allowing sales on credit; there could be possible bad debts.
Overspending
It is an issue we all have, but as a prudent business person, care should take with purchases. You can always keep your expenditure pattern under control with the help of cash flow management.
Growing your business
Now you have got a reasonably successful business with the help of cash flow management. Are you thinking of expanding your business? That means you will have more stock, staff, and maybe a different location. Preparing a cash flow for your additional business would be ideal due to more income and expenses. It would be best to manage your cash flow again daily until the financial management is controlled.
I hope this article has helped you implement cash flow management in your business. Always remember as the first thing in the morning to check your cash position before you start to work. That helps and inspires you to do better in your business.