Starting a business is a good way to generate additional income, follow your passion or monetise a hobby. That said, one fundamental principle of running a business is managing the cash flows as this is the heart-beat of every business. Without proper cash flow management, the business will not be able to meet its obligations and will face liquidation. In this blog I will be looking at ways of monitoring your cash flows when running a business.
What is cashflow?
Cashflow is the total amount of money being transferred into and out of a business. It is actual cash that is coming into the business and being used to pay for expenses and eventually dividends. This can either be cash in your bank account or cash in hand. This should not be confused with profits. Profits are driven by transactions recorded when they occur or deemed to have occurred not when the cash is received. For example, an invoice is recorded in the books when it is issued not when the cash is received.
Key Indicators you need to be aware of
It is important to know generally how long it takes for your invoices to paid from when they have been issued. An invoice enables you to convert the services or product provided into cash depending on the type of business you run. Knowing the time, it takes for the invoices to be paid will affect payment schedules for expenses and/or employees. The system for issuing invoices should ideally be automated so that you are able to view the information when needed. When you know how long it takes for the invoices to be paid, you will also be able to plan when to issue the invoices, follow up and escalate if not paid. This will help you become more proactive in debtor management and avoid any cash leakages.
Expenses and creditors
When starting out in business, it is easy to overlook planning your expenses and to just buy things as you go along. Having a budget in place helps you to time your purchases and bill payments based on when you are due to receive cash for you invoices or plan for any foreseeable cash shortfalls. It also provides the following benefits;
- You are able monitor how much you are spending based on the plan you have.
- You control how much you spend and it also enables you to investigate any overspends in order to make necessary adjustments.
- If you buy certain items regularly, you can buy from one supplier who may be able to give you volume discounts and extended payment periods were possible.
- If you pay certain regularly, you can also arrange to have a payment date that is after your cash receipt date.
It’s important to set aside a small amount of cash for future unforeseen circumstances and future obligations. Having the right amount of cash stops you from going into debt however, any excess cash can be invested to earn interest and retain value. This can be implemented following a budgeting plan.
Proactively managing cash that is coming in and going out will help you to spot any cash leakages and plan for shortfalls.
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