An Effective Cashflow Option
Many aspiring entrepreneurs dream of huge profits when they start up a business.
The reality is, however, that without an effective cashflow system, your business won’t survive long enough to pull in a dollar surplus.
In its simplest form, cashflow is about making sure there isn’t a big gap between the money you pay out to staff, suppliers and other overheads and the money you receive from clients and customers.
Delaying the former for as long as possible while encouraging prompt payment of the latter has traditionally been the way to ensure healthy cashflow, allowing your business to operate day-to-day as well as grow.
Offering discounts for early payment, credit checks on new customers and rapid invoicing will help, as well as entering into flexible payment terms with suppliers, rather than just going for the operator that offers you the best rate.
However, you will need to be smarter than this is you are to do more than simply keep the wolf from the door.
Cash flow management
Cash flow management is all about balancing the cash coming into the business with the cash going out. The danger is that demands for cash, from the landlord, employees or the tax man, arrive before cash you’re owed is collected.
More often than not, cash inflows seem to lag behind your cash outflows, leaving your business short. This money shortage is your cash flow gap.
If a company is trading profitably, each time the cycle turns, a little more money is put back into the business than flows out. But not necessarily. If you don’t carefully monitor your cash flow and take corrective action when necessary, your business may find itself in trouble.
If cash flow is carefully monitored, you should be able to forecast how much cash will be available on hand at any given time, and plan your business activities to ensure there is always cash to meet upcoming payments.
It may be time-consuming, but a detailed financial projection will help you keep on top of your cashflow. This will help you stop living hand-to-mouth, hassling customers for payment while frantically putting off your account payables.
Identify the sources of your income and where your outgoings end up. Draw up a monthly or weekly cashflow forecast that will cover the coming year. Be realistic about your cashflow and match it up against your business plan.