Managing cash flow is a crucial aspect of running a successful business; and one that is often not understood or managed effectively. It involves an element of analysing, predicting, managing, and monitoring. Ultimately, it eventually comes down to optimising.
The simple goal is ensuring that the cash that comes in (the "inflows") is always higher than the cash that goes out (the "outflows"). Clearly, cash can't be conjured up if the business is not performing well, but many businesses fail even when they are doing well; primarily because they are not managing the cash.
So, here are five tips to help you avoid that scenario.
Build a forecast: Start projecting your cash to understand your cash inflows and outflows. Think about, and log down, all those future inflows and outflows. What about that quarterly VAT payment for example?
Plan for different scenarios: Plan for different scenarios and understand the challenges of your industry. This is often known as "stress testing" and looking at the impact on cash from different outcomes, usually adverse. What if that big contract doesn't come in?
Manage your working capital more efficiently: Put simply, understand the impact of your debtors and creditors. How long does it take your debts to get paid? What would be the impact on your cash if you got paid one week quicker?
Monitor: With all the hard done projecting, stress testing and managing working capital, monitoring is critical but so often ignored. Adapt your forecast for changing events. Is cash flow following the broad pattern that you predicted? If not, why not?
Take action early: Even businesses that do all of the above can fail to take action early enough or decisively enough. It might be that your are facing a cash crunch at a particular time of the year and need some short-term financing. If you wait until you hit the crunch, then you certainly won't get favourable lending rates and, even worse, you may not even get the funding. Act early. It will show you are in control.
In conclusion, the phrase "cash is king" is true. Businesses often fail, not because they aren't profitable, but because they run out of cash. Implementing even these five critical steps will greatly reduce the changes of that happening to you.
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