Effective cash flow management – the term for adequately facilitating the stream of money coming in and going out of your company – is crucial to keeping your small business afloat. If you take in less money than you spend, the venture isn't viable. After funding from avenues such as commercial loans and your own personal accounts dries up, you'll soon find yourself having to close your doors.
Surprisingly, even though financial analysis is an imperative part of remaining solvent, many entrepreneurs are too focused on other tasks to devote a sufficient amount of time to establishing and maintaining a healthy cash flow.
A common misconception is that only companies with declining sales can fall prey to poor cash flow. However, it can happen to anyone. As Bankrate.com notes, fast-growth companies are particularly susceptible because they have to find the funds to stock up on inventory and pay workers while they're waiting to get paid.
The source offers several financial tips for entrepreneurs eager to avoid a cash flow breakdown.
One useful thing to remember is that you're the head of your company, and consequently, you should own your finances as much as you do everything else. That's not to say you shouldn't enlist the help of an accountant or financial services expert, but don't pass everything off to another person. If you're not financially minded, set a goal to change that. You'll likely never develop a natural aptitude for accounting, but taking some basic financial management courses will at least give you the knowledge you need to read and interpret your financial statements.
Relatedly, it's a good idea to monitor your finances. All too often, small business owners only get an inkling that there's something wrong after a problem has been brewing for a while. Cash flow issues are unlikely to resolve themselves on their own, and the longer you go without addressing them, the more complex they'll be to fix. Keeping an eye on your company's revenues and expenditures will alert you to the first sign of trouble so you can deal with it accordingly.
No-one expects you to be able to see the future, but an educated guess can go a long way when it comes to cash flow management. Estimate annual and quarterly sales and expenses based on previous data and economic conditions, and adjust these as time goes on, the source advises. You can even put together multiple budgets for best- and worst-case scenarios, as well as the most realistic outcome.
It's unlikely your strategy will be totally on point, especially in the early stages of your cash flow management efforts. Instead of getting discouraged, use this disparity for good – namely, identify what went wrong, analyze why it happened, draw up a plan to correct errors as best you can and take another shot next year or next quarter.
Even if your company's doing well and your expenditures are being balanced out by your revenues, don't rest on your laurels. Look further down the road and try to anticipate any cash flow threats, making an effort to preempt them before they even become an issue. Put a portion of your profits into a rainy-day fund, because while the small business skies might be sunny for you now, the recent recession should serve as a timely reminder that you're likely to need that reserve money at some point.