To avoid problems with your operations, the most important business metric to monitor is cash flow. Averting cash flow mistakes is vital to weathering the punishing headwinds of market forces.
Whether your business is a start-up or a seasoned operation, harsh economic conditions can threaten your survival. Managing the downturns is possible – and crises avoidable – by maintaining an unswerving devotion to forecasting cash flow and handling incoming money efficiently.
Fortunately, there are valuable tools to help you ensure that ending cash balances align with hoped-for results.
The concept of cash flow appeals to the basic instincts of a business operator: starting cash plus incoming cash minus outgoing cash equals cash flow to expand and pay yourself.
If you contribute personal funds to your business or borrow from a financial institution, account for these separately from business income so that you know where your cash is coming from. Cash flow projected out for six months will show each distinct cash source, plus the amount of incoming funds, along with all cash outflows.
With an understanding of forecasted cash flow, you’re able to manage your cash and make precise improvements to avert cash shortages. In addition, cash flow projections that reflect anticipated negative cash situations demonstrate to lenders that you have a grip on your cash position; you don’t wait for amorphous imponderables to become problems before seeking solutions.
Help from tech
Being too busy to scrutinize financial data is a common refrain of many entrepreneurs. Just as common are the business owners who believe their finances are organized while neglecting the crucial issue of cash management.
Fortunately, technical help is available. Topping the list of useful financial technology is accounting software. The correct choice depends on your type of business and how much of a hands-on contribution you can make.
Some cloud accounting software presents data output in simplified formats. This may or may not deliver enough detail for cash flow projections. You’re more likely to get more value by spending a little more for accounting software with a budget model and cash flow reports built into the application. These give your accountant or bookkeeper avenues for providing you with useful cash management information about the recent past and projections for the future.
Cash flow information prepares you to take action in urgent situations by giving you the power to control factors affecting cash flow. For instance, you can make spending adjustments on variable expenses and alter the timing of large purchases to navigate forecasted cash crunches.
You also can change invoicing habits and payment terms. Submitting invoices via email is a proven way to enhance cash flow, and some accounting software handles this process. It takes less time than submitting invoices via stamped mail, and records are easily accessible.
Offering simple payment methods is another approach. Accepting credit and debit cards is a first step. But you can collect cash faster, without increasing collection costs, through online payment systems and direct debit.
How do you know these methods work? Your cash flow reports will tell you.