Cash flow basically represents the money that flows in and out of your business. It’s most often measured in increments of time such as monthly, quarterly, or annually. General rule of thumb suggests that if you want your business to survive, you must have good cash flow. That’s easier said than done, as many businesses have cash flow problems.
This doesn’t necessarily equate to more cash coming in than you’re spending. Often times businesses spend much more than they are earning or taking in so they can scale.
However, there are plenty of cash flow problems that will harm or even tank your business.
1. Debts
First and foremost, as a business it’s very important to have good credit. If you borrow any money on a line of credit, make sure it’s paid back in a timely manner. Owing money isn’t necessarily a bad thing, just make sure the interest rates aren’t killing your cash flow.
The debts you need to watch out for are those that are owed to you by your customers. At the end of the day its your responsibility as a business owner to make sure you have a good credit control system in place so you can monitor what money is owed back to you. If a potential customer has a history of bad credit, you can ask for a certain amount of cash upfront so you can cover your potential losses or avoid doing business with them altogether.
2. Book-keeping
This is arguably the most important way to prevent cash flow problems. If you’re just starting out its often difficult to handle the book-keeping side of things when you’re trying to handle everything else. Often times hiring an accountant may be expensive so you’re left with few options.
Luckily for you, there are plenty of accounting software services that you can utilize that can help you keep track of your books. Most of these services have free options while others have tiered pricing structures that will clearly outline which pain points they’ll solve.
Here are a few of the best bookkeeping apps to check out:
- Due (personal company)
- Freshbooks
- Quickbooks
- Zoho
3. Good Forecasting
While it’s often difficult to “predict” the future, its always important to plan for it. If you aren’t a finance whiz yourself, consult an accountant or find a good finance partner to bring onboard your team.
Organize a thorough plan that will outline your predicted cash flow on a monthly basis. This plan will help you avoid cash flow problems. Try your best to be as precise as possible because overtime your ability to forecast accurately will improve. As the months go by you can check your predictions with the actual cash flow and eventually will be able to predict almost exactly what you’ll be spending and earning.
4. Scaling too Quick
Every business wants to expand, because expansion usually equates to more cash flow in the end. When you scale your business you need to be strategic. You should never spend money you don’t have, even if it is promised to you. Often times entrepreneurs scale too quickly and spend money that they don’t have with the expectation of earning or raising more. This can quickly lead to problems because you never know what the future holds, if you invest too much money in the “potential” profit, you may end up harming your actual profit.
Whether you’re a small business or a multinational conglomerate its always important to have a steady grasp on your cash flow. Avoid cash flow problems by implementing some of the suggestions in this post.
