Why Cash Flow is Your Business Life Blood
It is a sad fact that many startup business ventures fail quickly. Though there is no single reason why, some experts feel that too often entrepreneurs lack the financial knowledge to analyze cash flow and really understand what is happening with their company.
But that doesn’t mean that you need to add getting an accounting degree to your already packed to-do list. Some basic knowledge and judicious use of a spreadsheet can help you stay on track and fully informed.
WHY CASH FLOW MATTERS
As odd as it may sound, you can make a good profit but have little cash. This is because you might have debt, lease payments, equipment expenses, or sales that were made on credit. By knowing when you might run short of cash, you can search for additional financing or change repayment terms on debts. But none of that can happen unless you can project what your cash flow will be.
BEGIN WITH A CASH FLOW SPREADSHEET
In order to be able to predict your future cash flow, begin by going back for three to five years and looking at your financial statements. Tax returns will do if you don’t have financial statements, but you might have to look in some additional areas if they don’t contain all the information you want.
Once you have all the information available to you, enter it into a spreadsheet. Don’t worry if you haven’t used one before. There are plenty of online tutorials for creating your first spreadsheet, and the help sections of most spreadsheet programs are user-friendly.
DETERMINE YOUR CASH FLOW POSITION
If you need to make a quick determination about your company’s cash flow position, you can use the Quick Ratio. You take your current cash, accounts receivable, and cash equivalents and divide them by your current liabilities. Don’t include inventory in the equation because it takes awhile for this to be converted into cash.
SWOT ANALYSIS OF CASH FLOW
It’s necessary every so often to take a step back and look objectively at your business. A SWOT analysis examines Strengths, Weaknesses, Opportunities, and Threats. Realistically looking at where your company stands can help you make important decisions about how to prepare for the future, including what to do about financing.
There are a few simple things you should do to keep yourself on track. First of all, make sure the person who writes the checks is not the same person who signs them. When customers need refunds, one employee should approve the refund and another should actually issue it. If that isn’t possible, make sure any receipts from refunds are checked every day.
COLLECTING YOUR MONEY
Take an in-depth look at how long it is taking to get customers to pay for the services you gave them. If the time for you to get your money is getting longer, find out why. Maybe you are letting customers have credit who are bad risks, or perhaps you need to put more emphasis on collections. Cash flow will quickly improve if you can shorten the length of time it takes for you to get paid.