Cash flow management is one of the most crucial aspects of running a business. Poor management of cash flow can lead to bankruptcy, and that’s why it is crucial to be proactive in managing what’s coming in and out of your business. In this episode of The Finance Café podcast, Shauna and Melissa Houston, a CPA, entrepreneur, author, and founder of She Means Profit, discuss the top five tips for managing cash flow.
Did you know that approximately 7,000 businesses go bankrupt every year in Canada? Surprisingly, 82% of small businesses that fail, do so due to poor cash flow management. However, as entrepreneurs, we have the power to change this statistic by improving our cash flow management. With the right tools and knowledge, we can avoid the pitfalls of poor cash flow and keep our businesses thriving.
As entrepreneurs, we often get into business because we have a passion for something, but financial literacy, accounting, bookkeeping, and financial management have not been taught in our school systems. Therefore, we need to take that first step to understand our business finances.
What is Cash Flow
Cash flow refers to the movement of cash in and out of a business. It’s a financial term that refers to the amount of cash generated and used by a company during a specific period. Cash flow is important for businesses because it helps them to understand where their cash is coming from and where it’s going. A positive cash flow indicates that a business is generating more cash than it’s spending, while a negative cash flow means that a business is spending more cash than it’s generating. Understanding cash flow is crucial for making informed financial decisions and managing a successful business.
Melissa defines cash flow management as being proactive in managing what’s coming in and out of your business, so you never run out of cash. If you run out of cash, you won’t be able to meet your financial obligations, and the doors of your business could close. Melissa recommends being aware of what cash is coming into the business and what cash is going out. This awareness can help entrepreneurs make better decisions for their business.
“Managing cash flow is essential for building a profitable and sustainable business. The minute you run out of cash, you’re not able to meet your financial obligations, and you risk the likelihood of the doors closing on your business.”
– Melissa Houston
If you’re running a business, it’s important to have a clear understanding of your cash flow. This is where a cash flow statement comes in handy. This financial statement shows how changes in your balance sheet accounts and income affect your cash and cash equivalents. By analyzing this statement, you can gain insight into where your cash is coming from and where it’s going.
In addition to understanding your current cash flow situation, it’s also important to forecast your future cash flow. By projecting your cash flow based on past data, you can anticipate when your business might experience a cash crunch and prepare accordingly. This can help you make better financial decisions and ensure your business remains financially stable.
Tip 5 Tips for Managing Cash Flow
- Create a forecast of your cash flow
Tip number one is to create a forecast of your cash flow. This involves planning out your bank balances and everything that’s coming in and going out for the next six to eight weeks. By forecasting your cash flow, you can plan ahead and ensure that you have enough money to cover your expenses. You don’t need to be good at math to do this. You can use a calculator, a piece of paper, or an Excel spreadsheet to create a forecast.
- Have a Cash Reserve
Tip number two is to have a cash reserve. This is important for those times when you are running short on cash. You should have a pot of cash reserves set aside to help you during the leaner times. Cash reserves can be anything like a line of credit, but you should have every intention of paying that credit back immediately. Ideally, you should have a cash reserve that you’ve saved up and keep it in a high-interest savings account. A good rule of thumb is to have three to six months of operating expenses set aside as a cash reserve.
- Manage the Sales Side of Your Business
Tip number three is managing the sales side of your business. You should have a good understanding of your sales cycle, how long it takes to close a sale, and how much revenue you can expect. By understanding your sales cycle, you can plan ahead and ensure that you have enough cash to cover your expenses during leaner times. If you find you are running out of cash frequently, it may be time to re-evaluate your pricing strategy for your business, to ensure you are getting paid your worth.
- Manage Your Expenses Carefully
Tip number four is to manage your expenses carefully. You should always be looking for ways to reduce your expenses and save money. This could mean renegotiating contracts with suppliers, finding cheaper alternatives for office expenses, or even cutting back on unnecessary expenses. By managing your expenses carefully, you can free up cash that can be used to grow your business.
- Stay on Top of Your Cash Flow
Tip number five is to stay on top of your cash flow. You should be reviewing your cash flow on a regular basis, ideally weekly or monthly. This will help you to identify any potential cash flow problems before they become a major issue. You should also be tracking your expenses and revenue closely so that you can make adjustments to your forecast if necessary.
In conclusion, managing cash flow is crucial for the success and growth of your business. By following these five tips, you can ensure that you have enough cash to cover your expenses, manage your sales cycle, reduce your expenses, and stay on top of your cash flow. Remember, it’s important to be proactive and plan ahead when it comes to managing your cash flow.