Most small business entrepreneurs gauge the success and health of the business based on variety of things like sales growth, strong customer loyalty and profit margins. These are indeed critical metrics, however, the reality being that it is important to have balanced cash flow that indicates the well being of the business, since it is cash that helps to pay all monthly bills, cover payroll and to invest it back in the organization.
Essential Steps to be Followed
With five effective professional cash flow solutions, it is possible for the business to derive immense growth and success in the long run.
- Understanding where the entrepreneur stands: Just by looking at the income statement would not alone shed any light on the cash flow situation of the organization. Income statements simply reveal expenses, profits and sales at a particular moment. The cash flow statement on the other hand displays clearly movement of money out and in of the business over a particular time period, be it for a month, quarter or even a year. With this statement, one can also know the amount of cash that has entered and exited the business, besides the balance at the month end. This in turn, helps the entrepreneur to know if the reserves are being added or eroded
- Visiting the source: As a matter of fact, cash flow issues could arise from end of business cycle – receiving or spending. The business spends on different operational expenses like cleaning personnel, internet and phone connections, electricity, repair and renovations. Growth related expenditures could deplete quickly the precious cash reserves. Understanding source of cash flow problems can help to avoid tough situations.
- Keeping cash flowing: Fixed expenses need to be minimized. Only recurring and predictable needs are to be spent upon. Creative ways are to be found to handle demand peaks without employing additional staffs. Moreover, non-cash ways are to be looked for to make purchases. For cash coming into business, it is to be ensured that what is owed is received on time, and clear expectations and payment terms are to be set. If credit is to be extended to customers, the terms need to be clear and discounts to be paid for prepayment, while implementing penalties for late payment. Collections and follow-ups not to be neglected.
- Having proper fallback plan: Numerous financing sources to be prepared in advance to meet needs for extra cash. Some financial institutions might extend loans or line of credit to the business if it is in sound financial health.
Managing growth: With opportunities in growth arising, cash flow projections are to be planned carefully. How much is to be spent for reaching the goal is to be decided well in advance, including the time that would be taken for paying back the debt. Each investment made, be it in on equipments, people or inventory, it needs to have better returns. Every investment is to come with good profits. Also, the customer is to be treated as an investment having scheduled returns, which in turn would help not only to improve on cash flow, but also in profitability.