Every small business must know how to do their cash flow analysis and manage cash flows. In business, cash is king, and your company will survive challenges if it can manage this resource well. Businesses fold shortly after they begin mostly because they run out of money.
Cash flow analysis gives you an idea of the inflow as well as the outflow of money in your business. It helps you get a sense of your liquidity, which will tell you whether you have enough to pay your bills and keep the lights on. Here are some expert tips for managing cash flow in 2021.
Know your break-even point
This is often represented by a number that indicates where your total cost and total revenue are the same. At this point, there is no profit or loss. Knowing this point will not have an effect on your cash flow, but it will give you a goal to reach. In forecasting where your cash flow should be, the break-even point serves as a guidepost.
Focus on cash, not profit
People confuse cash and profit very often. A business that is profitable can have a low cash balance and a business with high cash balances need not always be profitable. Make sure you keep a close eye on cash inflow and outflow. Fixed costs are a constant source of outflow such as your insurance policy. Make sure you review your Shop Insurance policy and compare policies online to get the best price for the cover you need. Are you receiving payments from customers on time? Is your credit policy working for you? When it comes to supplier payments, are you negotiating terms that are conducive to your cash flow?
Maintain a cash reserve
Every business will experience lows and highs. The lows happen often, but the business should be strong enough to traverse those shortfalls. Having a cash reserve will help the business weather the bad times and drive your business growth forward, in spite of difficulty.
Hire an expert
Most business owners specialize in running their business, which involves putting together resources to create something bigger. As a result, they do not have to do everything. Unless you absolutely do, make sure you hire an accountant for your business. An accountant will be responsible for managing your cash flows and will tell you when your cash flow is in trouble. A side benefit of having an accountant is that they will manage other obligations like taxes and compliances for you.
Collect receivables immediately
Evaluate your credit policy. If it’s too relaxed, it may be the reason your business cash flow is suffering. Rewrite your invoice template to read ‘payable immediately’ and do not have terms that extend beyond 15 days. If customer payments are late, designate someone to schedule customer follow-ups. Then, have that person send a reminder to chase payments and keep your business cash healthy.
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If you do not want to institute net terms at all, set up a discount that you can offer customers who pay early. Inform employees of the strict eligibility criteria that qualify customers for a discount. Discounts should not be handed out willy-nilly.
Instead of finding experts to do each thing perfectly, look at hiring smart people who will take on multiple roles. You may end up spending a little more per person, but you may save money by hiring fewer people. If the cashier of your store can be recruited to perform a cash flow report every day, you may be able to train them to do a cash flow analysis every month too. Just make sure that your demands of each person are reasonable.
Change in inventory
If your cash flow statement includes a line that reads ‘change in inventory’ and the number is negative, you may have bought more inventory than you sold. If the number is positive, you probably purchased inventory for a healthy business cycle. Be sure to examine this line closely.
If you’re not tracking your cash flows, it can become very difficult later on to know where it’s gone. You can use an invoicing software or platform to make sure you are receiving payments. The invoicing software can be linked to your accounting software to ensure that cash flows are all accounted for. When your financial reports come out, you will have all the data in an understandable format.
It’s easy to neglect your cash flow in your relentless focus on profitability. But both are equally important. Whenever you draw up a business plan, it is also crucial to include the plan for cash flow management. It’s vital that your cash flow is healthy. We hope that these tips help you maintain your cash reserves and revamp the health of your business in 2021. Read more interesting stories and news from the right news network.