For most small businesses, there’s a cash flow continuum, from surplus to deficit and points in between. You can move from one position to the next, in either direction, very quickly. So it’s no wonder that business owners and advisors are in total agreement that cash flow is the lifeblood of small business.
Forbes contributor TJ McCue describes cash flow in easy-to-understand terms: “…how money moves in and out of your business, usually over a set period of time.” McCue cautions against confusing cash flow with profitability, because a business can be profitable and still not have cash on hand. The key—and the challenge—he says, is getting a real-time look at your cash flow position. Which means committing to and evaluating your business’s financial health on a regular basis.
If you haven’t been staying on top of your cash flow, you’re not alone. To get you started, CPA Philip Campbell has offered up 10 Cash Flow 101 rules to help you take control of your cash flow so that you can spend your time developing and growing your business.
At first glance, some of the rules may appear to be self-evident. Like #1: Never Run Out of Cash. But because small business owners are multi-tasking non-stop every day, they can find themselves in this unenviable spot before they know it.
Campbell’s other rules are also deceptive in their (apparent) simplicity. From Do Today’s Work Today to Don’t Manage from the Bank Balance, the 10 rules provide a step-by-step checklist for making sure, he says, that you are managing cash flow—instead of your cash flow managing you.
Campbell also stresses the importance of having cash flow projections to be able to know where you expect your cash flow to be in six months. National Association of Self-Employed (NASE) Business Expert Gene Fairbrother concurs in writing about cash flow on the NASE blog, Self Made. Fairbrother suggests using a basic management tool to “keep your finger on the pulse of cash flow.” A cash position report, he says, is one that owners can easily create every week or every day to get a quick real-time picture of your cash position, as well as a look ahead.
Click here to follow Fairbrother’s guide for setting up your own cash position report, as well as to read more of his excellent recommendations and important questions every business owner needs to ask in learning to manage cash flow like a pro.
Like anything else, there are wrong ways to do it, and missteps can be costly, as business advisor John Lafferty has written on the informative cfo-pro.com blog, Cover Your Assets. In his article, Cash Flow Mismanagement Can Drain a Company’s Lifeblood details some of the most common ways cash flow is mismanaged—and what you can do to avoid these potential pitfalls. Lafferty points out that cash flow can be negatively impacted by practices occurring in any number of a business’s operations, including receivables, pricing and margins.
Consulting a financial advisor can be invaluable in becoming proficient in managing your cash flow. If you’re already doing it well but are perhaps looking for tools to improve your efficiency, McCue also suggests four web-based solutions for business owners to check out.
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