Companies will need to weather many financial ups and downs. Managing cash flow is the single most important rule of the game for small, growing companies. What is the best way to stay on top of your business’s financial future? Here are the biggest lessons regarding cash flow management:
Determine Your Breakeven Point
You should know when your business will become profitable. It gives you an early goal to strive for and a ready-made target for projecting future cash flow. Negative cash flow and negative profits make for a grim combination.
Use a Cash Flow Worksheet
If you cannot manage your cash flow within the first year, you will likely not survive the second year. The two elements of your cash flow analysis include: Accounts receivable, and accounts payable. Prepare cash flow projections for next quarter and next year. An accurate cash flow projection can alert you to trouble well before it strikes. The second part of making an accurate cash flow projection is a detailed knowledge of amounts and dates of upcoming bills. Your projection should include all rent, inventory, wages, taxes withheld or payable, benefits paid, equipment purchased for cash, utilities, office supplies, etc.
Stay positive
Proactively position your company to be in the black every month. If this requires your company to increase your fees, cut staff or cut discretionary drainage, do it. Companies that fall into the negative even for a short period can begin a downward spiral that can take months to recover from, if they ever truly recover.
Clear contracts make good clients
Contracts should be clear on your billing policies, and clients should be notified in advance of any changes in these policies. Late-paying clients should be immediately contacted so they know how seriously timely payments are to your company. Use this call to determine if there are any service-related reasons that are preventing the client from paying in a timely manner also. Give clients an incentive to pay early by offering early payment discounts. Keep clients credit to a minimum and keep credit requirements strict. You don’t want every customer walking in the door approved for credit.
Have a Plan-B
If your forecast reveals an upcoming cash crunch, rally your team to determine a back-up plan. For example, offering clients the opportunity to pre-pay for a discount on their fees, or cutting non-discretionary expenses, etc. Develop a strong relationship with a good commercial lender ahead of time. It helps to always have a credit facility in place that will enable you to draw down funds on an as-needed basis.
If your cash flow stays positive, your business can survive turbulent waters. Cash flow management processes and policies keep you in the know, and keep you focused on reaching that first profit.