Cash flow management is the process of tracking how much money is coming into and out of your business. This helps you predict how much money will be available to your business in the future. It also helps you identify how much money your business needs to cover debts, like paying employees and suppliers.
Five Rules for managing your cash flow
- Keep your books accurate and up to date. Your cash flow is only as good as your accounting and reporting.
- Don’t be too lenient with your customers.
- Keep your accounting simple.
- Keep your business and your personal finances separate.
- Build a cash reserve.
A cash forecast will allow you to determine how much capital you will need to get you through those critical few months in that next phase of business growth.
Prepare a cash forecast
Every business needs to track cash inflows and outflows to ensure they have sufficient cash to pay the bills. Whether you’re at the start of your business or well into the lifecycle of your business, managing cash is critical for the well-being of your business, and cash management does not happen by chance. It is up to you to ensure that your cash is managed.
We will do this by preparing a cash forecast or budget.
We learnt earlier about Direct and Indirect costs which are fixed or variable.
It’s easy to forget an expense here or an expense there, but before you know it, your cash forecasts are useless. The cash forecast is only as good as the inputs so you must carefully prepare this.
A good way to check if you have captured all direct and indirect costs is to look at your bank statements – have you accounted for every transaction?
There may be expenses that you have left off your cash forecast as they are, for example, annual payments.
Good cash flow management will ensure you always have money available for paying your expenses when they are due. Even profitable businesses can fail if cash flow is not managed properly. If you don’t have enough money available to pay your lenders or suppliers, banks may foreclose and suppliers could cut supplies
What is a cash flow forecast?
A cash flow forecast is a plan that shows how much money you expect your business to receive and payout over a set period of time. It can help you plan how much you expect to make in sales and spend on costs. It can also help you understand when money will enter and leave your bank account.