Solid forecast is crucial step to keep cash flowing
A solid cash flow forecast combined with several other tools will help the owners of growing companies be proactive in battling a potential cash crunch. This article will discuss the benefits of a well planned cash flow, how to manage income in the early phases of a business and ways to ease a cash crunch.
Expenses rise with sales
Watching your business grow to new heights is exciting. While caught up in the excitement, it is easy to lose sight of increasing operating expenses that allow you to achieve the new revenue levels this may ultimately lead to an unfavorable cash flow situation.
Although all businesses are at risk of incurring unexpected expenses, growing businesses are especially prone to unforeseen costs. A company experiencing rapid growth or one that has only been in business a few years may not have the advantage of knowing its customers? paying habits or understanding the business cycles that may put it at risk.
Regardless of the reason for tight cash flow, the message is simple: Learn from your mistakes.
You heard it in junior high and it still applies: Prior Planning Prevents Poor Performance. As a business owner, you make financial commitments every day. In order to be successful, you need to feel confident that you will have the cash flow to meet these commitments.
The first step to ensuring this is to create a cash flow forecast. While this task may sound as much fun as sorting your sock drawer by style and color, it will pay dividends for the time invested.
Your forecast is only as good as the assumptions behind it without solid assumptions, a cash flow forecast will not be a valuable tool to your business. When developing the forecast, keep in mind such things as seasonality and industry norms.
If your company doesn’t have the internal know-how to produce a cash flow forecast, there are a plethora of resources available for you to tap. The first place to start is your accountant or banker. If those are not viable options, there are numerous software packages that do not require an MBA to navigate.
A quick Google search will provide more cash management packages than State Fair attendees at the French fry stand. Do your research and invest in the appropriate resources to develop the forecast it will prove to be some of the best money you have ever invested.
Once the cash flow analysis is in place and has been fine-tuned, the following steps can be taken to ease a cash crunch:
- Get to know your banker. While taking on debt is not the end-all, it may be a way to carry you through a slow time. A line of credit can be used and paid down as cash flow improves. This also provides a good safety net for your business. At the time of a cash crunch, you may not think you are a prime candidate for the bank, but the reality is that it is in the bank’s best interest to see you and your business succeed.
- Reduce receivables. Offering discounts in a tight time may seem out of the question, but enticing your customers to pay early may do double duty. It will please your customers to know they have saved a percentage or two and it will boost your bank account, allowing you to reinvest in your business. Persistence with slow-paying customers is also crucial: a sale means little if you never get paid for it.
- Scrutinize your inventory. While inventory is vital to many businesses, it is also quite costly to keep on hand. Scrutinize your inventory and adjust to the necessary levels to meet customer demand.If you are hanging on to old inventory, slash it and get whatever you can for it. While this will not necessarily be the key to surpassing your target goals long term, it will provide cash in the near term.
Also consider the need to actually bring in physical inventory. Some items may be offered on a special order basis such items are usually more expensive and would require cash to be tied up in inventory for some time.
- Keep capital expenditures in check. You went out on your own and you want to show the world how successful you are. Just remember, most businesses have grown to where they are now they didn’t start there.While some businesses require a stellar store front, others can skimp on the frills until cash flow provides the needed resources.
- Cut costs. Seems simple, but as a new business owner your emotions can get the best of you at times. Keep things in perspective and ask yourself if each cost is adding value to the business. If not, consider cutting or delaying it. Spend as you need to, but postpone the extra purchases until the bank account allows for it.
Remember, the cash flow forecast is a tool for you to and reuse. It will likely be a work in progress for many months as you learn about your growing business, follow its trends and adjust the cash flow for changes in the business.
By using these tools and keeping things in perspective you will be able to get through the inevitable cash crunch that most businesses ultimately encounter.
