Protecting Your Cash Flow

Cash Flow

Cash flow refers to the balance available after allowing for all receipts and payments from your business. This includes, but is not limited to, rent, payroll, taxes, supplier invoices, loan payments, and asset purchases – the lot.

Most of us know that managing and protecting cash flow as a small business owner is pivotal to long-term success. The inability to manage the ebb and flow of cash can cripple inventory, negatively impact on growth and create a backup in bills that can be hard to overcome.

Even a business that is “good on paper” can suffer from negative cash flow. So how do you prepare to stay ahead of the curve?

Start by mapping out the financial year. Call upon past years to build a realistic timeline of financial peaks and valleys. Pay attention to when your business tends to experience a fluctuation in cash flow. Just being aware of this timeline in advance can help you prepare for tight times.

Once you have mapped out this timeline, use it to create financial

projections on a weekly, monthly, and yearly basis. These projections should be an inherent part of your business plan although they require constant reviews.

Next, define your cash cycle. Examine how much cash is generated in each cycle. Then determine how much of your resources are tied up in these cycles and what are they tied up on. Incorporate this knowledge into your projections.

Beware of cash flow black holes, as well! Plan well in advance for any expansion, heavy business-to- business sales or inventory purchases. If planning on acquiring new equipment, consider using leases or long term funding to ease the burden of major purchases.

Next, understand your fixed and variable costs. See how you may be able to improve the return on both of them.

You should also note your most “difficult” customers including late payers. Billing those customers early when possible can help improve cash flow during tight times. Offering incentives for early payment can be extremely helpful for banking receipts a lot earlier than usual.

Finally, examine these three vitals as identified by business experts:

1. Collection days – the length of time customers have to pay invoices

2. Inventory turnover – how long inventory sits on the shelves waiting to be converted into sales

3. Payment days – the length of time you wait to pay your own bills

In order to maintain a lifeline of cash in the long run, these items should also be monitored at each step of your projection phase.