What is cash flow, and why should I care?
Key points in this article
- Compare your forecasts against actuals
- Regularly review ways to reduce expenses without affecting capacity
- Review payment terms to help speed up the cash flow cycle
Cash flow and how to manage it effectively is top of mind for many business owners. Setting up a good cash flow management system is critical to not only running your business effectively but it can also help you to feel in control.
Cash flow management essentials:
- Project your sales
- Track your sales against your projections
- Cash flowing out – how does cash flow out of your business and what actions to take to minimise this
- Cash flowing – understand how cash flows in and how you can maximise it
1. Projecting sales
Forecasting sales is often the hardest part, but with solid research there’s no reason for these figures to be a stab in the dark.
- For a new business, base your projected sales on market research.
- If you’re already up and running, previous sales records are invaluable but make sure to take trends and seasonal fluctuations into account.
2. Tracking against your forecasts
Once you’ve done your forecasts, what happens to them? If you never look at them again you’re missing a golden opportunity to improve your forecasting technique.
Comparing your forecasts against actuals can be invaluable for fine-tuning your approach and producing forecasts you really feel confident in using to help manage your business.
Forecasting is a vital part of setting goals in your business
How do I forecast?
If you don’t want to waste time starting from scratch with your forecast, just download our free cash flow forecast template, which comes with full instructions.
3. The cash flowing out
Overheads can easily creep up over time, so regularly review all major expenses and think creatively about ways to trim them without affecting capacity. Technology can be a great ally – for example, cut travel costs with teleconferencing.
How much stock do you really need?
Any surplus stock you have sitting round represents cash you can’t easily get at. Prevent over-ordering with a strict inventory control system. Look carefully at which products aren’t selling well and adjust your orders from there. Discounting stock that isn’t shifting may help to clear the decks.
Regularly check your expenses so you can assess which ones could be reduced
4. The cash flowing in
Dealing with debt
It’s not much fun, but most business owners have to chase money they’re owed at some point. Putting it off can make your business seem like an easy target so it’s worth keeping on top of it.
Be clear in the first place about your credit terms, and stay firm and consistent in following them up.
Streamline those assets
Have a thorough review of assets such as premises, vehicles and equipment. If you’re not making good use of them, you may be able to sell or lease some to generate quick cash.
When you next buy assets, investigate whether buying or leasing is the best route.
Changing the way you’re paid
Depending on your business, changing your payment terms or moving away from supplying on credit altogether may help – cash sales or card payments through a merchant account will help to speed up your cash cycle. Get more tips on improving your cash flow with our Cash Flow Improvements Checklist.