You know well that you need to do a cash flow spreadsheet. You keep hearing how important it is to your business. But for most small business owners, it’s just one more thing on a neverending to-do list.
Almost no one has time for projections when you’re trying to build the business, execute your marketing plan, manage your suppliers—and what not. And when you finally take out time for finances, your focus moves to catch up on outstanding bills, maybe organizing your receipts, and if you’re really lucky, reviewing your cash flows timely. Generally, the cash flow is neglected in favor of more pressing business matters.
But if you are not in the habit of paying attention to how money is moving in and out of your business, you really need to get that habit. And that too, right now. You should work in order to make your’s the #1 business resolution of the year.
Cash is the lifeblood of your business. No business can perform any operation without cash. Like, you can’t pay for your supplies, you can’t pay your employees, you can’t pay your rent. 30% of small businesses fail because of a lack of access to cash. And that’s a really bad time.
On the other hand, if your business has appropriate cash flow, you’re able to pay for everything you want. Either it is the upgrades to equipment, hire more staff to meet increased demand for your product or service or for investment for your growing business.
How cash flow affects your business
It is difficult to be aware of your business’s cash flow to know if you’ll be able to pay your bills when they fall due. It is necessary to create the inflow and outflow of your business every 3-4 months. This will help you advance planning for any major expenses your business need in the coming period.
It’s also important to note the procedure of cash flows into your business. Is it completely depending on the customers paying their bills? Do you manage it by taking bank loans or overdrafts? Or do you need to borrow money from other sources to fund the day-to-day business needs?
For instance, if you pay your employees and suppliers every two weeks, but invoice your customers on the last day of each month, do you know if you will have enough money in the bank to pay everyone by the end of the month? How dependent are you on your customers paying on time and immediately? What happens if someone is late with a payment?
If you are confused about the situation above, you definitely need to have a deep analysis of cash in your business. Most of the times, the answer lies near like, “We borrow money from our line of credit or overdraft with the intention of following up on overdue payments”.
Learning how cash flows in and out of your business can keep your business from failing like that 30 % of bankruptcies we mentioned earlier. So how do you do this?
Related Post: Your Ultimate Guide to Simplified Filing
Managing Your Cash Flows
It is not a difficult task to maintain your cash flow statements as much as you think. If you are using any accounting software, it is good as it will tell you about your monthly expenses automatically. If not, you can do it manually by noting down all the statements in a separate excel sheet.
This is a small sample of how your cash flow goes like. There are seasonal cash cycles for every business, and knowing what those look like will keep you from unwelcome surprises. You’ll notice there are some months when “end cash” is negative. That’s a big problem for your business, but knowing it’s coming means you can move things around, and change your payment options.
Maybe you can put that big expense on your credit card and pay it off a month later, or maybe you’ll set up a meeting with the bank to get access to a line of credit, overdraft or small business loan to cover the shortfall.