Cash flow is one of the most common challenges entrepreneurs face. Fortunately, prudent cash flow analysis and management can help ensure you'll be able to weather the tight times, whether you have a startup with limited revenues or a well-established enterprise confronting a sudden cash shortage.
Mastering Cash Flow Analysis
- Stay Current: The foundation of good cash flow management is knowing precisely how much cash you have on hand today. This means you keep your business accounting separate from your personal finances and keep your books up to date. Always calculate your burn rate or negative cash flow. Your total cash reserves divided by the burn rate equals the number of months you can continue in business if no new revenue comes in. Starting a business with less than a year's worth of cash in reserve to tide you over is usually a risky prospect.
- Understand Tomorrow's Numbers: Financial projections are a must for any business, not only because they establish revenue goals for the future but also because they help build a cash flow analysis. Model a number of what-if propositions: For example, what if you fail to snag any new customers in the next six months? Answering this type of query in advance will make you more nimble should these scenarios occur.
- Embrace Lean Operations: Identify and eliminate duplication or wasted effort at all stages of your business. Re-examine each of your business processes (manufacturing, sales, customer service, etc.) with a view toward removing bottlenecks. In the long run, this will save money and improve your cash flow management.
- Maintain a Just-in-Time Inventory: If you sell or resell products, don't keep more than a week's worth of safety stock unless you can confidently guarantee high demand. Shipping and logistics are much quicker these days, so renewing dwindling inventory on short notice is easier than it used to be.
- Don't Splurge: If you need computers, buy them used. Work out of your home instead of leasing office space. Negotiate for bulk discounts from your local office supply store. Cultivating an awareness of how to save money will help you better navigate rocky fiscal terrain.
- Delay Payments: You'll be doing business with plenty of vendors, so look into negotiating longer-term repayment plans. Most vendors will be more than happy to work with you as long as you can provide steady monthly payments. The cash you don't put into a full payment can be plowed back into your business.
- Rush Accounts Receivable Collections: If you're owed money, try to collect it as soon as possible, by issuing reminders to customers and cutting deals if necessary with clients who might otherwise short you the entire amount. Don't become your customers' creditor by providing goods or services they don't pay for promptly. Consider doing credit checks before accepting clients to ensure you aren't taking on a poor risk.
- Employ Credit Judiciously: If you can't work out longer repayment terms from vendors, use your credit cards to their best effect. Charge business expenses to your cards at the beginning of the payment cycle. That way, you can delay final payment by as much as 45 to 60 days.
- Defer Your Salary: If you're looking for investors for your company, note that they are more interested in CEOs/owners who are willing to give up their own salaries in order to give the business a better chance at profitability. Not paying yourself for a year is a good rule of thumb; if you still have to withhold your own pay after that, consider the possibility that your business will never take off. On the other hand, a full year of missed salary means more cash to pour into revenue generation, which means better cash flow management in coming years.
- Try Creative Compensation: You won't get far without hiring employees, but if you don't have the cash to fund traditional compensation packages, think about mixing them up by offering equity in the business to valued workers. You also can offer perks such as telecommuting, a casual dress code or a nice break room. If you can get people to believe in your company, and to work for a larger share of future revenue in rather than a big immediate payoff, you will be able to turn employees into assets rather than drains on cash flow.
Following these 10 cash flow analysis principles will improve your small business' ability to survive the lean years and sock away cash when times are good.