An individual has heard it a million times – cash flow can make or break a business. Lack of cash flow planning is the reason why many businesses fail. In fact , many PROFITABLE businesses fail because of cash flow problems. Without adequate cash flow, you can’t pay your bills and you can’t make plans for your business.
So… what exactly is cash flow planning? Cash flow planning is projecting your future cash inflows from sales, services, and loans, plus comparing them to your future cash flow needs (suppliers, salaries/wages, loan payments, taxes, etc . ). The difference between the 2 is your net cash flow.
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Why is cash flow planning so important? Cash flow planning will help you identify problems down the road, and fix them before they occur. Cash flow planning can also help you make decisions like should I attend that conference I’ve truly wanted to attend, should I buy the new computer I’ve been wanting, or should i work extra hard this month to avoid a cash flow deficiency next month?
The first step in planning your cash circulation is knowing where you spend your money! Solo entrepreneurs need to have a good grip on both their personal and business spending, as most solo entrepreneurs depend on their business income to meet private finance goals (i. e., settle the bills! ). So , you should track both your personal and your business spending, even though I recommend that you keep them separate (that’s a topic all by itself).
What’s the ultimate way to track your spending? You can use note down & paper, spreadsheets or a software application. The best method for you is the method that you actually use on a regular basis.
You should project your spending for at least the next 12 months so that you include annual along with other periodic expenses. If you are experiencing a cash flow crisis, you should track & project your cash flow on a weekly basis, instead of monthly.
If you are an existing business, you can project your cash stream for the next year by reviewing your own expenses for last year. If you are a new business, you will need to estimate your launch costs in addition to regular operating costs.
Start up costs include inventory, legal expenses, advertising, licenses & lets, supplies, and many more costs that you may not have thought of. To research startup costs you need to contact your local Small Business Development Center, contact a SCORE counselor, join groups of similar business owners, and examine as many books or articles you will find on the subject.
To improve your cash flow, you need to:
1 . Complete the first 3 ways. You have to understand cash flow planning, monitor your cash flow, and project your future spending needs before you can improve your cash flow.
2 . Create best and most severe case scenarios and create appropriate responses to both scenarios. For example , if your best case scenario is to enhance sales by 50%, how will you use the profits? Will you put the profits back in the company by investing in new equipment, education, etc .? If your worst case scenario is a fall in sales by 50%, how can you continue to cover your monthly costs? By planning for the best and worst case scenarios, you’ll be ready for any situation.
3. When estimating the future income, realize that some people will pay late, and account for that fact in your projection.
4. Charge what you’re well worth. Many businesses, especially service professionals, under-charge when they are first starting away. This is a great way to go out of business. Make sure you are charging what you aren’t worth, and remember you’re in business to make money, not to give your knowledge away for free.
5. Watch your company spending. Focus on the value the item produces in your business, and avoid lavish spending (i. e., do you really need the fastest, newest computer available? ).
6. Don’t hire until necessary. Consider utilizing virtual assistants or temporary employees before hiring permanent employees.
seven. Give incentives for early transaction for products and services. On the flip side, chase straight down invoices the minute they’re late. Cost interest or late fees in order to encourage timely payments.
8. Revise your cash flow regularly. Your cash movement plan will change frequently as your business grows. You may want to update your cash circulation plan weekly when you first get started, then switch to monthly once you’ve got a good handle on your cash flow.