The difference between a company that succeeds and one that fails is often cash management. Businesses typically take on debt and it is important that you have cash flow projections to provide comfort that the debt can be repaid in a timely fashion.
Having too little cash flow means you may be unable to deal with unforeseen circumstances, having to pass on profitable ventures, increasing loans to overcome liquidity issues, and creating a reduction to the value of your business
Here are some key business budgeting and cash flow tips to think about when operating your business.
1. Cash flow is different than profit
- It is movement of money in and out of your business
- Your business can still generate profit and have negative cash flows
- Your business can also generate a loss and still have positive cash flows
2. Utilize tools to manage your cash flows
- Prepare, analyze, and manage budgets
- Ensure you know what your businesses cash requirements are
- Consider if your business has seasonal fluctuations – as this will affect cash flow
- Think ahead to any large capital expenditures that may be required that will require cash
- Have a contingency plan in place
- Consider financing options if you need cash or investing options if you have a cash surplus
3. Cash spending, collection & payment
- Manage inventories to ensure turnover is appropriate
- Progress invoice where necessary
- Ensure invoices are prepared promptly and credit terms/policies are in place
- Collect down payments when necessary
- Negotiate credit terms on accounts payable
- Request trade and volume discounts where necessary
4. Ensure you budget for taxes
- Because you can generate a profit when you have negative cashflows, you may owe corporate taxes even when you have no cash
- Ensure you are keeping “cash on hand” to pay your tax bill
5. Estimate how much cash is needed on hand
- A good estimate is 3-6 months of overhead activity
- Project any large future expenses
- Consider your debt and required loan payments
6. Cash flow budgeting/projections should be updated
Considerations include:
- Does current financing remain viable?
- Reconsider variable costs (can you cut spending in certain areas)
- Consider alternative or new revenue streams that fit with the business
- Convert fixed costs to variable when possible
- Are shareholders drawing more cash than necessary
Conclusion
It is said you need to spend money to make money, however, it is important that you have that cash on hand to spend. Hopefully by applying some of the above concepts, it can help your business to prosper and manage it’s cashflows and budgeting.
