Without continuous, positive cash flow, you can’t have a successful business. Even though this is one of the basic truths of running a small business, many entrepreneurs struggle with cash flow management every day. Poor management and control issues can quickly snowball into major problems, and sadly, many of those struggling business owners are forced to shut down.
Implementing the right strategies as early as possible can often stop problems in their tracks. To improve your own cash management, use these seven cash flow best practices:
- Forecast both your sales and your costs | You want to be prepared for every situation in business. Your monthly forecast will help you plan ahead for the upcoming year’s sales spikes and slow downs so that you can plan cash flow disbursements before they become a problem.
- Know your unit costs | How much are you really paying to make a product or provide a service? Many business owners overlook or simply guestimate this number. However, in order to effectively measure costs and make a healthy profit margin, you need an accurate cost of goods sold per unit.
- Aim to increase cash inflows and decrease outflows | A clear sign of a healthy, growing business is higher cash inflow then outflow. Your goal should always be to widen the gap between these two by increasing your revenues and lowering your expenditures.
- Measure your actual profits vs. forecast | Your forecast plays a significant role in measuring your business’s progress. By comparing your actual performance with your forecast you can determine if things are going well or if corrective action is needed.
- Track your spending | Lunch here and an extra run to Staples there; little expenses add up quickly and are often forgotten. Use some type of expense management system to track who is spending what and when. The extra details will help you identify problem areas when reviewing your cash flow reports.
- Use your personal funds sparingly | One of the most common financing solutions for small businesses are the owner’s personal finances. While this may occasionally be necessary, continuously dipping into your personal funds to finance your business during tough times is very risky. It can create problems outside your business as well, such as with a spouse or your ability to pay personal bills.
- If you don’t NEED it, don’t spend it | Before you make any purchase ask yourself, “do I really need this?” and “is there a more affordable option?” There is a big difference between a need and a want. We want brand new and shiny, but often times used and older models are just as good for half the price.
If you want to grow your small business successfully, start from day one using these cash flow best practices. If you’re struggling, it may not be too late! If you’re not using these practices, work on integrating them into your business today to get yourself back on track.