You have heard it a million times : cash flow can make or break a business. Lack of cash flow planning is the reason why many businesses fail. In fact , many LUCRATIVE businesses fail because of cash flow issues. Without adequate cash flow, you can’t pay out your bills and you can’t make plans for your business.
So… what exactly is cash flow planning?
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Cash flow planning is projecting your future cash inflows from sales, services, and loans, and comparing them to your future cash flow demands (suppliers, salaries/wages, loan payments, taxes, etc . ). The difference between the 2 is your net cash flow.
Why is income planning so important? Cash flow planning can help you identify problems down the road, and repair them before they occur. Income planning can also help you make decisions such as should I attend that conference We’ve wanted to attend, should I buy the new computer I’ve been wanting, or do I need to work extra hard this month to avoid a cash flow deficiency the following month?
The first step in planning your cash circulation is knowing where you spend your money! Solo entrepreneurs need to have a good grasp on both their personal and company spending, as most solo entrepreneurs rely on their business income to meet private finance goals (i. e., pay the bills! ). So , you should track both your personal and your business spending, even though I recommend that you keep them separate (that’s a topic all by itself).
What’s the simplest way to track your spending? You can use pencil & paper, spreadsheets or a computer software. The best method for you is the method you will actually use on a regular basis.
You should task your spending for at least the following 12 months so that you include annual as well as other periodic expenses. If you are experiencing the cash flow crisis, you should track & project your cash flow on an every week basis, instead of monthly.
If you are an existing business, you can project your cash flow for the next year by reviewing your own expenses for last year. If you are a brand new business, you will need to estimate your launch costs in addition to regular operating expenditures.
Start up costs include inventory, lawful expenses, advertising, licenses & lets, supplies, and many more costs that you may not need thought of. To research startup costs you need to contact your local Small Business Development Center, contact a SCORE counselor, join groups of similar business owners, and examine as many books or articles you will find on the subject.
To improve your cash flow, you should:
1 . Complete the first 3 measures. You have to understand cash flow planning, monitor your cash flow, and project the future spending needs before you can improve your income.
2 . Create best and worst case scenarios and create appropriate replies to both scenarios. For example , in case your best case scenario is to raise sales by 50%, how will you make use of the profits? Will you put the profits back to the company by investing in new equipment, education, etc .? If your worst case scenario is a fall in sales by 50%, how will you continue to cover your monthly expenditures? By planning for the best and worst case scenarios, you’ll be ready for any situation.
3. When estimating your future income, realize that some people will pay later, and account for that fact in your projection.
4. Charge what you’re well worth. Many businesses, especially service experts, under-charge when they are first starting out there. This is a great way to go out of company. Make sure you are charging what most likely worth, and remember you’re in business to make money, not to give your experience away for free.
5. Watch your business spending. Focus on the value the item produces in your business, and avoid lavish spending (i. e., do you really need the fastest, newest computer available? ).
six. Don’t hire until necessary. Consider utilizing virtual assistants or temporary workers before hiring permanent employees.
7. Give incentives for early payment for products and services. On the flip side, chase lower invoices the minute they’re late. Cost interest or late fees to encourage timely payments.
8. Up-date your cash flow regularly. Your cash movement plan will change frequently as your business grows. You may want to update your cash stream plan weekly when you first get started, after that switch to monthly once you’ve got an excellent handle on your cash flow.