To help your business become more financially free it pays to keep close attention to cashflow (among many other metrics and KPIs). While most businesses have this staunch focus on profits, cashflow is equally as important to focus on. Profitable businesses generally have positive cashflows, and a great deal of that depends largely on attention to detail and their ability to manage cashflow. We believe these cashflow best practices and fundamentals will serve as a great foundation for your business to build a financially freer future.
1. Make projections frequently
By closely monitoring key cashflow data and variables, you’ll be able to make more up-to-date projections of future cashflow. This will ensure decisions on business spend will be well informed from a cashflow perspective, and you will be more likely to keep your business out of financial trouble.
2. Prepare cashflow forecasts
Forecasting sales and expenses for a given period relies on historical figures, such as customer payment histories, as well as industry norms, averages and trends, plus current economic and business conditions. Project monthly cash inflows and outflows during the period. As you go through the budget period, compare and update your budget based on actual monthly performance. It is important to include your net cash position, which is:
Cash on hand at the start of the period + Estimated cash inflows – Estimated cash outflows = Net cash balance
3. Accounting 101
All these best practice tips won’t help if you don’t understand the key concepts of basic accounting. This way you’ll be able to understand financial statements and balance sheets better, and you’ll be more capable of monitoring the financial health of your business.
4. Identify issues early
A stitch in time saves nine. The sooner you identify a problem, the better, and the easier it could be to fix. For example, if you need to approach your bank to request flexibility, they’ll be more receptive to helping your business if the request is made well in advance.
5. Have a contingency plan
If the unexpected worst-case scenario ensues, and you find yourself in a cashflow crisis, a clear and well thought out back-up plan can provide you with peace of mind and a source of reserve cash in case you need it one day.
6. Grow smarter
Growing your business too quickly can be risky. As you prepare to sell more and expand, you first need to spend more, buy more raw materials or hire more staff. If the amount of time between your increased cash spend and increased sales is too long, you could find your cashflow drying up. Precautions are necessary when growing your business and wise to identify financial risks by having a business growth plan in place that avoids long delays between cash outflow and inflow, and that pays very close attention to managing cashflow.
7. Invoice quickly
Delays in invoicing customers will just add to wait times to receive payment. Streamlining invoices as soon as possible can increase cashflow sooner rather than later.
8. Use technology better
Tools exist that can help you manage your cashflow easily and productively. Most businesses will benefit from cloud software across inventory management, accounting and point of sales. Check out what apps Unleashed integrates with.
Cashflow best practices begin with monitoring your cashflow closely. This means keeping up with what customers owe you and getting that money as quickly as possible. It’s equally important to keep track of what your business owes others and making sure that they are paid on time. Then ultimately knowing when there are shortfalls and taking the steps to fix them as quickly as possible. This means your business needs to actively track your cashflows. Consider automating these monitoring processes rather than relying on error-prone and labour-intensive spreadsheets. This data can then be helpful for insightful and more accurate cashflow forecasts. It is helpful to actively review variances in actual results as compared to cashflow forecasts and use this process to refine and improve the accuracy of your forecast assumptions.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.