Most entrepreneurs only consider their cash positions. While it is important to know the position of your most liquid asset. It's also important to understand what will affect it.
Positive cash flows means your business is running smoothly. But what the difference between cash or just knowing the balance in your bank account. Understanding your cash flows will help you to plan ahead for sales efforts, marketing efforts, inventory, salaries, ect.
The statement of cash flows is organized into 3 main categories:
- Operating activities
Items from the income statement are converted into cash such as customer collections and cash payments to vendors.
- Investing activities
Lists the purchase and sale of long term investments, property and equipment
- Financing activities
Contains the sum total of the changes that a company experienced during a reporting period that are caused by either owners or lenders providing long term funds for the business or returning those funds to the owners or lenders.
Here are some tips to better manage your businesses cash flow:
1. Determine your break-even point
- You must know when what it takes to make your business profitable
2. Maintain some cash reserves
- Your business' survival depends on your ability to maneuver though shortfalls. There will be shortfalls, having reserves ensures you won't stress about them.
3. Use a cash flow worksheet
An excel spreadsheet is ideal and make it easily accessible. Keep it in your Google Drive folder or Dropbox.
4. Collect receivables ASAP
Keep it net 30 and net 60 in terms in contract terms to a minimum. Delegate the task of keeping an eye on receivables and contacting customers periodically to collect payments.
5. Encourage customer to pay up faster
Offer customers early payment discounts and keep credit requirements strict. Set standard and enforce them!
6. Extend payables as long as possible
Extend your payables to net 60 or net 90 if you can. But avoid late charges
7. Boost Sales with Creative Incentives
Find creative ways to boost sales. Consider sponsoring a contest, hosting a customer appreciation event or offering referral incentives.
8. Designate a Cash Flow Monitor
Assign the task of monitoring cash flow. Have the person inform you when you reach a certain threshold. You know like Chase does when you reach your minimum balance limit.