The year is coming to a close, and it may be time to review – and renew! Your current financial plan has been great to you, but there may be ways to take your business, and your cash, further. Cash flow is an integral part of any successful business strategy. Attempting to run a business without a good cash flow strategy is like trying to sail a ship across the sea without a rudder – it will prove futile. At KBH, we hope to advise and help you at every step of your business journey. This can range from valuation services to “simple” things like a cash flow strategy.

While cash flow strategy is vital for all businesses, new businesses depend on it completely. We want to help you succeed and having a sound cash flow approach will ensure that you will have not only a successful new year but also, a successful lifetime with your business.

There are three core items to remember for a good cash flow analysis:

  1. Accounts Receivable (AR) is what customers and clients owe you.
  2. Accounts Payable (AP) is what you owe vendors and suppliers.
  3. Shortfalls are situations where cash from AR doesn’t cover the expenses in AP.

You should be able to successfully manage all three areas, and ideally, you’d have a comfortable surplus or margin between Accounts Receivable and Accounts Payable. But, there’s also some strategy and tips that can help you get there – and maintain it.

Calculate Where You Will Break Even

If you can’t break even, then ultimately you can’t make a profit. Figuring out your break-even point will not affect your cash flow, but it will provide a baseline which will become integral to your cash management strategy later.

Focus on Your Cash Flow Management, Not Just Profits

Your ability to manage cash flow will be the bread and butter of your day-to-day business. If you do it well, the profits will come. Using your break-even point as a baseline, manage your business’s cash flow strategy to create a profit, and then stick to that strategy once you’ve become profitable. Watch yourself grow!

Build up Cash Reserves

Sadly, for some businesses, there will come a time in the life of your business where it is hard to make ends meet. AR may not always add up to equal the AP, and you could find yourself with a shortfall. This is where having adequate cash reserves comes in handy. With a good-sized cash reserve, you can draw on these accumulated reserves to meet the needs of the business during dry spells without going into the negative and perpetuating the problem. But don’t forget to replenish these reserves!

Utilize a Cash Flow Worksheet

If you can’t measure it, you can’t control it. You need to maintain a clear picture of your business’s cash flow situation and projections. A good starting point for this is to create a spreadsheet to track cash flow details – if this seems like “a lot” there’s always your trusted advisor or accountant that would be more than happy to help.

Collect Your Receivables

You wouldn’t leave a coffee shop or restaurant without paying for the service, so when customers or clients owe you outstanding debts and you don’t collect on them, you’re at a loss. It’s important that you have clear payment terms – obviously these differ from business to business. Be realistic in all situations, but the general principle remains: you can’t spend money you’ve earned but don’t have, and you don’t have money you haven’t collected.

Put Someone in Charge of Monitoring Cash Flow

It is always beneficial to have someone in your company who keeps a regular eye on cash flow and updates you regularly as necessary. This will allow you to see what needs to be adjusted to ensure certain minimums are met and profitability targets are reached. It can be a simple preventative measure that keeps your business in the clear.

Don’t be Afraid to Ask for Help

Whether it’s a friend with a business, a team member, or reaching out to someone with a little bit more experience than you, asking for help is never a bad thing. Especially when it comes to your hard work. An advisor, even a bookkeeper, can help bring you from point A to point B. Whether it’s a simple tip to use cloud-based technologies to store your cash flow spreadsheets or helping you (re)develop your business plan, a second set of eyes never hurts.