Begin With the Basics of Your Money

Business funds typically exist in two forms: cash on hand and funds in a business checking account. Ensuring you have enough cash flow to cover expenses, maintain emergency reserves, and invest back into the business is vital. Setting aside as much money as possible is crucial—one significant emergency could jeopardize your business if you're not prepared. For instance, should your industry face negative publicity, you might need to ramp up advertising efforts, which may exceed your current budget.

How Cash Flows Through Your Business

Most businesses operate on a 30-day cycle. This means that within a month, you'll sell products, receiving some payments in cash and others on credit, typically due in 30 days. At the end of this period, you'll restock your inventory, collect accounts receivable, and restart the cycle.

There Is Cash and Potential Cash

In addition to cash and bank balances, it's wise to have assets that can be quickly converted to cash if needed, often termed "current assets." These might include marketable securities, prepaid expenses, and accounts receivable.

Cash Flow Analysis: Your Financial Strategy

For your business to thrive, maintaining a positive cash flow is essential. You must ensure that your income exceeds your expenses. To achieve this, a comprehensive plan is necessary. Start by assembling crucial documents, including your business plan, which should outline cash flow projections for the next 3 to 5 years. Regularly updating this plan—ideally every six months—is critical. Many entrepreneurs invest heavily in their initial plans but neglect them post-launch. Remember, this document is your roadmap to success.

In addition, gather all financial statements, including Profit & Loss Statements, Income Statements, tax records, and payroll data. Your accountant can assist in developing your cash flow analysis.

How to Create a Positive Cash Flow Plan

As previously mentioned, a positive cash flow is crucial. If your analysis indicates a negative flow, adjustments are necessary. Here are some strategies to enhance your cash flow:

1. Collect Accounts Receivable: A proactive approach to collections can significantly improve your financial health. For example, a company I assisted reduced its delinquent accounts list dramatically by intensifying collection efforts.
2. Review and Limit Credit: While extending credit can foster business growth, it should only be offered to customers who reliably pay on time.
3. Adjust Pricing: Pricing is often more about perceived value than cost. Customers will pay a premium if they believe the value justifies the price.
4. Establish Short-Term Loans: Consider setting up a line of credit with your bank for emergencies.
5. Increase Sales: While boosting sales may seem simple, remember that many sales will be on credit, which increases accounts receivable rather than immediate cash flow. Monitor your receivables closely, especially during promotions.

The Danger of In-Store Sales

Offering discounts can be tricky. For example, if you provide a 20% discount with a profit margin of 30%, you would need to double your sales volume just to maintain your original profit. If turnout is low, this could result in losses.

Other Considerations

It's important to define "cash on hand." This doesn't mean hoarding every penny. Maintain a minimal amount in cash while investing the majority in interest-earning, low-risk accounts. Consult with your financial planner to determine the best investment options based on current market conditions.

Do As Much as You Can Yourself

While I'm not an accountant, I manage my own accounting to better understand my business's operations. Having basic accounting software can be affordable and invaluable. Collaborate with your accountant to set up essential categories and start analyzing your reports. Many systems allow you to run "what if" scenarios to gauge the financial impact of different decisions.

The Last Word on Cash Flow

For small or home-based businesses, investing in a simple accounting system with the help of an accountant can yield significant long-term savings. My initial system consisted of organizing finances with envelopes—each designated for different expenses. While this approach is straightforward, it can lead to substantial savings over time. As your business grows, you'll face difficult decisions. Understanding your financial situation won't eliminate risks but can facilitate more informed choices.

For additional resources, consider purchasing my book or visiting the Small Business Administration website. Remember, money is a powerful tool that can grow or shrink based on how you utilize it.

How is your cash flow looking?

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This article is meant for informational purposes only and should not be interpreted as financial or legal advice. Always consult a financial professional before making major decisions.