Plenty of small business owners believe that in business, cash really is king, but few actually understand this concept. Majority of small business owners end up overstretching their credit because they fail to forecast their cash flow, and some of them can’t tell how much cash they should have on-hand.
Unfortunately, they only realize this when they’re scrambling around to get the cash they need. Seems familiar? Read on to understand better how cash flow works.
Timing really is key
Managing cash flow is not solely about quantity, but also about having sufficient cash during key times. For instance, having ample cash this week won’t really make a difference if you don’t have sufficient cash for covering payroll for your urgent care business two weeks from now.
One of the easiest ways to forecast your business’ cash flow is by using a spreadsheet program. When using a spreadsheet, add the outflows and inflows you’re expecting per week and always use formulas. Update the spreadsheet as regularly as possible, preferably daily.
Additionally, forecast your cash flow every quarter or at least twice a year to avoid cash shortages and to identify how certain decisions you made last September could affect your cash flow for November.
How much does your business really need?
The answer would, of course, vary from one business to another. The key is to efficiently manage your cash flow to ensure that you’ll always have enough of it regardless if your business needs it or not. Always be on the lookout for ways to boost your inflows and reduce your outflows such as the following:
- Leverage discounts in payables by always paying your bills in advance.
- Look for a more affordable payment processor to cut down on credit card processing charges.
- Reduce your variable costs. For example, while you can’t really lower rent costs, you can easily manage supplies orders, utility bills, inventory ordering, and payroll.
- Only order enough inventory.
How much is enough?
To answer this question, place your cash in two different accounts. One, your operating account for covering you at times when your business earns the least profit, two, your contingency account for covering major setbacks in your business.
For your operating account, include both variable and fixed expenses that you would need to cover even if no revenue is actually coming in. For your contingency account, combine all your assets, minus all liabilities, and then divide the amount by 365 to determine your average daily operating capital.
Next, try to figure out how long your business can survive in the event of a huge financial hiccup. Most startups keep a daily operating capital worth at least a year, while more established businesses keep a daily operating capital worth at least six months.
The main thing to remember is that overlooking cash flow management will increase the risk of your business failing. So make sure to have ample cash reserves and enough credit prior to even needing it. This could mean the difference between your business failing and surviving a financial crisis unscathed.