An individual has heard it a million times – cash flow can make or break a business. Lack of cash flow planning is the reason why numerous businesses fail. In fact , many LUCRATIVE businesses fail because of cash flow issues. Without adequate cash flow, you can’t pay your bills and you can’t create plans for your business.
So… what exactly is cash flow planning? Cash flow planning is projecting your future cash inflows through sales, services, and loans, plus comparing them to your future cash flow requires (suppliers, salaries/wages, loan payments, fees, etc . ). The difference between the two is your net cash flow.
Why is cash flow planning so important? Cash flow planning will help you identify problems down the road, and fix them before they occur. Cash flow planning can also help you make decisions such as should I attend that conference We’ve wanted to attend, should I buy the brand-new computer I’ve been wanting, or do I need to work extra hard this month to avoid a cash flow deficiency the following month?
The first step in planning your cash stream is knowing where you spend your money! Solo entrepreneurs need to have a good grasp on both their personal and company spending, as most solo entrepreneurs rely on their business income to meet personal finance goals (i. e., settle the bills! ). So , you should track both your personal and your business spending, even though I recommend that you keep them separate (that’s a topic all by itself).
What’s the easiest method to track your spending? You can use coop & paper, spreadsheets or a computer software. The best method for you is the method that you will actually use on a regular basis.
You should task your spending for at least the following 12 months so that you include annual and other periodic expenses. If you are experiencing the cash flow crisis, you should track & project your cash flow on a weekly basis, instead of monthly.
If you are an existing business, you can project your cash circulation for the next year by reviewing your expenses for last year. If you are a new business, you will need to estimate your start-up costs in addition to regular operating costs.
Start up costs include inventory, legal expenses, advertising, licenses & licences, supplies, and many more costs that you may not have thought of. To research startup costs you should contact your local Small Business Development Middle, contact a SCORE counselor, sign up for groups of similar business owners, and read as many books or articles you could find on the subject.
To improve your cash flow, you should:
1 . Complete the first 3 steps. You have to understand cash flow planning, monitor your cash flow, and project your future spending needs before you can improve your income.
2 . Create best and most severe case scenarios and create appropriate replies to both scenarios. For example , if your best case scenario is to raise sales by 50%, how will you use the profits?
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Will you put the profits back to the company by investing in new equipment, education, etc .? If your worst case scenario is a drop in sales by 50%, how can you continue to cover your monthly expenditures? By planning for the best and most severe case scenarios, you’ll be ready for any kind of situation.
3. When estimating the future income, realize that some people will pay past due, and account for that fact in your output.
4. Charge what you’re worth. Many businesses, especially service professionals, under-charge when they are first starting away. This is a great way to go out of company. Make sure you are charging what most likely worth, and remember you’re in business to make money, not to give your knowledge away for free.
5. Watch your company spending. Focus on the value the item produces in your business, and avoid lavish spending (i. e., do you really need the fastest, newest computer available? ).
6. Don’t hire until necessary. Consider utilizing virtual assistants or temporary workers before hiring permanent employees.
seven. Give incentives for early payment for products and services. On the flip side, chase lower invoices the minute they’re late. Cost interest or late fees to encourage timely payments.
8. Upgrade your cash flow regularly. Your cash circulation plan will change frequently as your company grows. You may want to update your cash movement plan weekly when you first get started, then switch to monthly once you’ve got a great handle on your cash flow.