You’ve 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 profitable businesses fail because of cash flow issues. Without adequate cash flow, you can’t pay your bills and you can’t make plans for your business.
So, what is cash flow planning? Cash flow planning is projecting your future cash inflows from sales, services, and loans, and comparing them to your future cash flow needs – suppliers, salaries/wages, loan payments, taxes, etc. The difference between the two is your net cash flow.
Why is cash flow planning so important? Cash flow planning can help you identify problems down the road and fix them before they occur. Cash flow planning can also help you make decisions such as, should I attend that conference I’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 next month?
The first step in planning your cash flow is knowing where you spend your money! Solo entrepreneurs need to have a good grip on both their personal and business spending, as most solo entrepreneurs rely on their business income to meet personal finance goals (i.e. pay the bills!). So, you should track both your personal and your business spending, preferably keeping them separate. (That’s a topic all by itself).
What’s the best way to track your spending? You can use pen and paper, spreadsheets or a software program. The best method for you is the method that you know you will use on a regular basis.
You should project your spending for at least the next 12 months so that you include annual and other periodic expenses. If you are experiencing a cash flow crisis, you should track and project your cash flow weekly instead of monthly.
If you are an existing business, you can project your cash flow for the next year by reviewing your expenses for last year. If you are a new business, you will need to estimate your start-up costs in addition to regular operating expenses.
Start-up costs include inventory, legal expenses, advertising, licenses and permits, supplies and many more costs that you may not have thought of. To research start-up costs you should contact the Small Business Development Corporation or join a network of similar business owners, and read as many books or articles you can find on the subject.
8 Steps to Help You Improve Your Cash Flow
- Learn about and understand how cash flow planning, tracking and projecting future spending needs will help improve your cash flow long-term.
- Create best and worst-case scenarios and create appropriate responses to both. For example, if your best-case scenario is to increase sales by 50%, how will you use the profits? Will you put the profits back into the company by investing in new equipment, training, etc.? If your worst-case scenario is a 50% drop in sales, how will you continue to cover your monthly expenses? By planning for the best and worst-case scenarios, you’ll be ready for any situation.
- When estimating your future income, realise that some people will pay late, and account for that fact in your projection.
- Charge what you’re worth. Many businesses, especially service professionals, under-charge when they are first starting out. This is a great way to go out of business. Make sure you are charging what you’re worth, and remember you’re in business to make money, not to give your expertise away for free.
- Watch your business spending. Focus on the value the item brings to your business, and avoid lavish spending – do you really need the fastest, newest computer available?
- Don’t hire until necessary. Consider using virtual assistants or temporary employees before hiring permanent staff.
- Give incentives for early payment for products and services. On the flip side, chase down invoices the minute they’re late. Charge interest or late fees to encourage timely payments.
- Update your cash flow regularly. Your cash flow plan will change frequently as your business grows. You may want to update your cash flow plan weekly when you first get started, then switch to monthly once you’ve got a good handle on it.
Remember – whether you are a new or growing business, your cash flow projection can mean the difference between success and failure.