65% of new businesses fail within a decade. Why? For all sorts of reasons!
They might have a subpar product, be outcompeted, suffer from mismanagement, fail to adapt, and so on. Of the many factors that enter the mix, though, there’s one that stands out above the rest: cash flow management problems.
Allow money to flow out of your company faster than it comes in and it’s a matter of time before you start to struggle! Want to avoid that fate? Check out these 3 simple suggestions for managing cash flow better in your business.
1. Understand Key Business Finance Terms
The first step is to wrap your head around some crucial cash-related terms. Understanding these terms (alongside the interplay between them) will give you a much better chance of managing cash with greater effectiveness. Here they are:
Positive cash flow
This is when the money entering your business accounts exceeds what’s leaving them! Being cash flow positive is the ultimate goal because it allows you to reinvest the surplus back into the business.
Accounts Receivable and Payable
Accounts receivable are the funds you’re owed by clients/customers, whereas accounts payable are what you owe the suppliers! It’s imperative that they remain in alignment. Allow either your accounts receivable or payable to grow too large and you’re on a one-way ticket to negative cash flow.
A shortfall is when you have less money in the bank than what you owe! Imagine owing someone $1500 but only having $1000 to spare. In this situation, you’d have a $500 shortfall.
2. Work Out Total Expenditure
How much money leaves your business each month? If you don’t already know the answer, it’s time to sit down and figure it out!
This is an all-important figure because it tells you how much you need to earn to break even. Hit or exceed that target every month and you’ll avoid negative cash flow. Miss it too many times in a row and you know there’s a problem to address.
Unsure how to proceed? Hiring professional management services, such as pacificgroupla.com, to put together cash flow projections for your business should help.
3. Have Sufficient Emergency Funds
It’s always worth remembering how unpredictable business can be. You never know when the economy’s going to crash, technology’s going to change, or a pandemic’s going to hit! To cover your back, alleviate stress, and mitigate risk, it pays to have a financial buffer in place.
Try to save up an emergency fund for that specific purpose. Saving between 3 and 6 months’ worth of expenses should help you weather any storm that comes your way.
Remember These Tips for Managing Cash
Cash is king when it comes to maximizing the likelihood of business success. You have to stay on top of your accounts, ensure that more money comes in than goes out, and take swift action to remedy the situation if/when negative cash flow problems arise. With any luck, the tips for managing cash in this article will help you get started in this regard.
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