As you know, starting your own business isn’t for the faint of heart, and you didn’t take the plunge because you enjoy leisurely amusement park rides. So stop fearing the roller coaster ups and downs of cash flow management. Taking charge of your cash flow isn’t as complicated as you might expect.
Understanding your business cash flow allows you to plan ahead and gives you a high comfort level that you will be able to meet your goals.
To achieve business success you must capture new opportunities, whatever the risks. This is evident when using cash for expansion or upgrades. Having cash on hand gives you a feeling of security, but your business will stagnate if you fail to deploy cash to grow. The only obstacle is making sure you have sufficient funds.
Determining Cash Flow
Start by assessing your company’s cash flow. Many enterprises have “cash basis” bookkeeping – income is recorded only when collected. Counting income when you send an invoice is “accrual basis.” When using cash basis, expenses are those already paid; accrual basis records expenses when you’re billed.
Your cash basis profit and loss statement (P&L) mainly reflects actual cash flow for both income and expenses. Some adjustment is required for cash outlays not on the P&L, such as principal paid on loans or purchases of furniture and equipment. Also, noncash accounting expenses such as depreciation are added to profit when determining cash flow.
Your accountant can create a cash flow statement as part of your monthly financial reports. This is particularly important if you have an accrual basis P&L. Accounting software such as QuickBooks allows printing of cash flow statements.
Evaluating Cash Flow
Improve cash flow by finding ways of reducing expenses without draining productivity. Sometimes cutting your own salary is the best option; a wise entrepreneur is willing to reduce his pay in the short term for a long-term gain.
A reasonable calculation of monthly cash flow is the average over several months. This is the amount of money your business generates to solve special problems such as equipment breakdowns as well as to tackle unforeseen events such as shipping problems or a late-paying customer. Calculate the cash you’ll need each month for these contingencies.
Cash flow is also required to reduce debt. You must keep your borrowing power intact for those times when you need an immediate loan.
After accounting for emergencies and loan repayments, the remaining cash flow is available for new goals.
Next, prioritize objectives for improving or expanding your business. Outline costs and benefits for each goal and identify best choices. Armed with the cash flow figures, you now can determine how many months of operation are required to safely build the funds needed for a particular task.
Goals such as upgrading equipment or adding an employee are easy to implement if you plan using cash flow management. Or you can use the excess cash flow to service additional debt. That analytical approach is what bankers need in order to loan you money to modernize and grow.