Are You Managing Your Cash Flow Effectively?
Learn How Small Businesses Successfully Manage Their Cash Flow
82% of businesses fail because of cash flow issues – that’s a lot. Managing cash flow, as challenging as it may be, is one of the most important things for business owners to stay on top of.
7 ways to take charge of your cash flow
1. Determine Your Breakeven Point
Although breaking even doesn’t have a direct impact on your cash flow, it helps to have a goal in sight. If you don’t already know your breakeven point, My Accounting Course has a short guide to help you calculate it in no time.
2. Manage Cash Flow First
A profitable business is the goal, but if cash flow is managed improperly, you’ll never get there. It would be like building a new house on a weak foundation.
3. Maintain Some Cash Reserves
There are times when cash flows out of the business at a faster rate than normal – it’s nothing to be concerned about, as long as you have reserves. By keeping a cash buffer strictly for these situations, you’ll be able to power through until cash starts flowing in again.
4. Use a Cash Flow Worksheet
By using this pre-built Microsoft Excel template, you’ll be able to see your cash flow trends at a glance, just make sure to keep it updated.
5. Encourage Customers to Pay up Faster
The faster you collect, the more cash you’ll have on hand. Do your best to minimize the amount of accounts that require 30+ day credit contracts. It will also minimize your overall risk, something lenders love.
6. Extend Payables if Possible
On the complete other side of the spectrum, try and extend payables as far as you can without incurring fees.
7. Boost Sales with Creative Incentives
Running a promotion or a new marketing initiative is a great way to give your cash flow a quick boost. Be careful, doing this too often may cause customers to catch on and wait until prices dip to come back, hurting business overall.
What to do during periods of negative cash flow
When cash flow gets tight, short-term financing might be the perfect fit for your business. Keep in mind, taking on debt will boost your cash flow, but it also puts a strain on your business.
Before applying for external financing, ensure your business can handle the added pressure by calculating your operating cash flow coverage. As put by Investopedia “The larger the operating cash flow coverage, the greater the company's ability to meet its obligations, along with giving the company more cash flow to expand its business, withstand hard times, and not be burdened by debt servicing and the restrictions typically included in credit agreements.”
The calculation for short-term debt coverage is simple, just divide your operating cash flow by your short-term debt.
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