The importance of cash flow management
If you are a business owner it is crucial that you do not overlook the importance of cash flow managing. Cash flow can be likened to the lifeblood of your business. If you have healthy cash flow your business can improve its chances to survive long term if your cash flow is less then healthy it can be fatal to your business. Many businesses have found out in the worst possible way that poor cash flow management has caused them to close their doors. If you do manage to stay in business despite having a poor cash flow then you will find that you have a constant problem when trying to make payroll and pay other expenses. However, there are tips that can help you effectively manage your cash flow. Here are some of those tips-
- Always know how much money is coming in-You should always be fully aware of what money is coming into your business. This can help you to better prepare to meet payroll and pay all of your other business bills. There are different ways that money could be coming into your business. These include but are not limited to:
1. Account receivables-These are payments that you will receive from your customers.
2. Interest payments-These generally come from business savings or investments that you have made for the business.
3. Shareholder investment-This is money that will come from shareholders in your business.
Successful business owners always have an idea of how much money is coming in. This helps you to prepare for unusual expenses or it will warn you if cash flow is decreasing which allows you to take additional steps to increase it either through additional marketing and/or increased sales efforts.
- Always know how much money is going out-Just like you know what money is coming in you should be fully aware of what is going out in terms of the money you spend. Many business owners are not even fully aware of what is being spent within their business. This can be a serious oversight. You will soon have critical financial problems if you don't know what is being spent and where your money is going. While every area of your business should be monitored in terms of cost there are certain areas that warrant especially close cost controls. These areas include but are not limited to:
1. Payroll-This is an easy area for a business owner to lose control of. You need to make sure that your payroll costs are in line with the production costs of your company. You need to make sure that you are utilizing the right amount of employees to keep production costs under control.
2. Rent/mortgage-This is most often the largest cost that any business has. It is crucial to determine if you are paying the right amount for the right space.
3. Purchasing-This is the area where many businesses often lose control of costs. You should take a close look at every piece of material that is being used within your business. This should include all supplies as well as fixed assets. Then you should determine if you are paying the best price possible for everything that you are using. Keep in mind that anything that does not contribute to the profitability of your business should be eliminated.
4. Accounts payable-If you are managing your cash flow then you will have a clear idea of how much debt your business is carrying and what that debt costs. Savvy business owners will always be looking for ways to refinance the debt to the lowest interest rate and positively affect the cash flow of their business.