rules for managing cash flow

Businesses thrive and fall on the basis of cash flow. There is no sentiment in business, and if you ain’t got the cash to grow, pay your bills and your staff, it’s more than likely you won’t be around for long. Harsh, but true.

 

Cash flow is as important at start-up stage as it is when your business is looking to expand further down the line. Therefore, if there is one skill that it’s crucial to get right from the start it’s how to manage your cash flow.

 

So, how do you do it?

 

1. Maintain your books

 

Accurate and well maintained records are crucial for positive cash flow. It’s only by knowing where you are in financial and invoicing cycles, as well as what you have in reserve, that you can guarantee your business always has the cash that it needs. Ensure your bookeeping is up to date and you’ll have an overview at all times of key information, from the assets your business holds, to the debts, income and profits over time.

 

2. Create a cash reserve

 

If you’re constantly operating close to the edge then it won’t take much to push your business over a cash precipice. Create a financial buffer and it’s much harder to end up on the wrong side of the bank balance. A reserve that covers two months worth of operating expenses will give you more than a fighting chance of both surviving and growing.

 

3. Stay on top of invoices

 

If your invoices aren’t being settled on time then your income will suffer. And if your income suffers then you will soon find that there isn’t enough cash in the bank to cover outgoings and/or make the investments you were planning.

 

It’s always worth considering whether it might be worth credit checking your customers before signing them up, depending on the business you’re in, to avoid non-payment. After all, what’s the point of having lots of customers if they can’t pay you by the time their invoice arrives? Be rigorous about setting terms for invoice payment and then stick to them. Clients who pay late one month and find that there are no consequences are more than likely to do it again, so always keep a tight reign on your outstanding invoices.

 

4. Expenses are everything

 

You may have a robust income and fantastic range of assets. However, if your expenses and costs are getting out of control your cash flow will soon weaken. Regularly assess your costs and work out whether any efficiencies could be made. Ensure that costs don’t spiral without your knowledge and that you’re working accurate cost predictions into cash flow forecasting.

 

5. What’s your cash flow balance right now?

 

If you don’t know the answer then you’re not on top of your cash flow. Cash flow management isn’t something you can put on the back burner for a couple of months and then pick up again. It needs to be constant so that you always have the relevant information at your fingertips that you can tap into at any time.

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