Managing and analyzing your small business’s cash flow can be a key skill for small-business owners. Careful cash flow management can allow you to plan for growth.
But before you can start making a cash management plan, you should know, what is cash flow?
Cash flow can generally be divided into three categories:
- Operating cash flow: cash related to day-to-day operations
- Investing cash flow: cash related to the purchase or sale of long assets
- Financing cash flow: cash involving investors
These types of cash can be combined to provide a full picture of your small business’s cash balances. Once you understand cash balances, you can begin to create a cash management plan.
Explore all cash flow options.
If your company has consistently negative cash flow, you may be at risk for bankruptcy. Consider exploring all cash flow options to keep your cash flow positive. Options can include securing a line of credit, negotiating more management payment terms with vendors or offering discounts to customers that pay early. You may also want to consider options like switching to ACH payments, paying taxes in installments or switching your payroll period. These creative approaches can help keep you out of a crunch and keep your company cash flow positive.
Have a realistic forecast plan.
Create a plan that makes sense for your small business. It’s great to be optimistic and ambitious when planning, but you should also have a safety net in case you face any pitfalls. When formulating a cash flow plan, try to not finish a month with negative cash. Have a margin of safety to accommodate any surprises that may happen, whether an employee leaves or clients pay late. If your cash flow projections include use of revolving credit, consider using it conservatively. Build in the assumption that some payments may not line up, and you may have the credit available to cover the shortfall.
Keep accurate logs and stick to your plan.
Once you have a realistic cash flow management plan, write it down and stick to it! Keep an accurate log of all the cash that's entering and leaving your business. Try to make sure your cash flow projections match up with reality. If you don't have an accurate log of your accounts, you may be overestimating or underestimating your cash flow.