What is cash flow? Cash flow is simply the total amount of money that is being transferred both in and out of a business. You can also say it is the financial statement that shows how cash enters in and out of your business in a given time.
There are three types of cash flow which are, cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. Remember that all three must be included on a company’s cash flow statement. In this article, we are going to be talking on how to manage cash flow in business.
Having a proactive attitude will enable you know what is on the horizon in many months to come and also enable you plan efficiently and have your funds lined up. All you need to do is to look at your current method for managing money coming in or going out of your business such as investments, bills, payrolls and purchases. Also keep in mind that a reactive cash flow plan is common in many businesses because you cant plan for everything but this will give you a realistic indication of your financial wealth.
One thing you need to keep in mind as a someone in the business world is that money coming into your business can also be monitored well by issuing invoices early to avoid late payments by clients or rather use automated payment methods with clients to make getting paid very easy and this will enable you spend less time chasing invoices and more time running your business.
In this case, a solid financial plan can help your business stay as flexible as ever because you will always be well-prepared to take advantage of growth opportunities and cope so well with unexpected change in the market space. Do you know that flexibility gives you competitive advantage? Lets take for example, it will allow you update equipment’s and bring in additional inventory without damaging your financial health in any way.
Also, try using the simple 1/3 rule which is one-third for dividends, one-third left in the business and one-third for taxes. It is always a good idea to have cash saved up, if things are going great it might not be necessary for now but some cash that is being saved away for the rainy days is always helpful.
LEARN YOUR CASH FLOW CYCLE
What is a cashflow cycle? A cash flow cycle is simply the time taken to purchase raw materials, turn them into your desired products, sell them and collect money made from selling the products. A certified public accountant and a famous writer by the name Philip Campbell once said, to understand your cash flow you need to be able to answer these two questions at any given time:
- What happened to your business’s cash last month?
- What’s about to happen to your business’s cash?
Have in mind that you will learn the answers to these questions by keeping your business’s profit and loss statements and balance sheets up to date and reviewing them all the time. Philip Campbell said that once you understand your cash flow cycle, you can correct any inconsistencies in it. Learning your flow cycle is one of the best ways to manage cash flow in your business.
BE STRATEGIC ABOUT YOUR GROWTH
In this case, rapid growth can often result in cash flow issues. FOR example, winning a contract might mean the need to invest in new employees but have in mind that Net 30, 60 or even 90-day terms can result in a payment delay and will cause a cash crunch on payroll day.
Have in mind that you should not shy away from growth opportunities because it might seem overwhelming but also know that you need to use your cash flow forecast to keep an eye on how long it will take to for you to pay back the debt that you used in growing your business. Look at your customers as investments and ask yourself if you are making profit and how long it will take to collect it, being strategic goes a long way when it comes to growth in your business.
In conclusion, managing cash flow is very critical when it comes to long term success of any business because by understanding the importance of cash flow and implementing strategies for effective cash flow management, businesses can achieve sustainable and unimaginable growth.