Every business owner wants to make more money. But surviving in business is not only about how much money you make, but when you make it and when you spend it. In other words, “cash flow.”
If cash flow is out of control so is your business. To keep cash flow problems from turning into a tidal wave that drowns your business, you have to plan:
- Understand the impact of timing
All businesses have to pay money out before being paid by customers. In a services business this may be minor: expenses such as marketing materials and basic administrative costs, rent, website costs or some travel costs. Clients will still normally pay well after you have outlayed for these items.
For manufacturers or wholesalers, things are much worse. In these businesses money is usually outlayed to pay for costs of manufacture or inventory. That’s in addition to the normal administrative costs and rent.
- Prepare a cash flow projection
Even if you don’t create an annual budget, sketch out when you expect money to come in and when you need money to go out. Take into account any seasonal variations that may affect your business.
- Watch your inventory
Inventory is just money sitting around in a different form. Whether it is marketing brochures or a warehouse full of books, inventory costs you. The drain of having your cash tied up often counteracts the benefit of the lower cost of buying in bulk. So aim for just-in-time inventory management to keep your cash liquid.
- Understand the impact of purchasing assets
If you purchase fixed assets from revenue, you may find yourself at year end with a profit and the money to pay your tax obligations tied up in assets.
- Manage growth
You may want your business to get bigger, but growth costs money. This isn’t just a matter of increased marketing expenses; it can also be additional expenses to produce new goods, hire employees, expand facilities, add equipment, and procure supplies. Typically, the bulk of these costs come before you’ve received sufficient income to pay for them. Growth eats cash, so be careful how fast you allow yourself to grow.
- Consider a line of credit or overdraft
A line of credit differs from a term loan. A term loan is for a specific amount of money, a specific amount of time, often for a specific purpose. A credit line is more like a credit card. You can take money out when you need it and pay either all or some back every month. Credit lines need to be used with a cash flow management plan.
- Prepare for a rainy day
Every business has income fluctuations. By starting to look for annual income and spending patterns, you have a better idea of when you’ll need cash. So build up your financial reserves in your high-income months to prepare for the lean months. The best way to have cash when you need it is to put some away when you’ve got it.