Avoiding Cash Crunches - Yahoo! Small Business

Avoiding Cash Crunches
AllBusiness.com

A company's cash flow is its lifeblood. Without a steady stream flowing in and out, you run the risk of damaging your credit and stalling the growth of your business.

The key to warding off cash flow problems is to project your cash flow needs. These strategies will help you manage your receivables and expenses so you don't get caught in a crunch:

Establish a receivable process. You can improve your chances of receiving timely payments from your customers by setting up an accounts receivable process that lets you record sales, generate invoices and monthly statements, and track your customers' current and past-due balances.

Forecast your cash flow. Study your customers' paying habits - especially for major accounts - so you can predict roughly when and how much they'll pay. The amount you forecast should be within 5 percent of your receivables each month. If your predictions are way off the mark, a cash flow problem could be looming.

Track expenses. Each month, compare your projected expenses to your actual expenses. This will help you anticipate the need for more cash and react immediately. For example, if you unexpectedly have to repair broken machinery, you can cut expenses elsewhere or take an advance on a credit line.

Project your sales. It's easy to assume the demand for your products or services will be high, but it's safer to base your projected sales on facts. When you can project your sales revenues for a specified period, you can spend accordingly.

Use past experience to project future sales, and talk to your customers to determine their future needs. If you're just starting out, market research will help you determine how much demand exists for your product or service.

Track your sales. Even after you've projected your sales, you need to monitor your actual sales to make sure you're on track. If sales dip below your projections, the sooner you make adjustments - cut expenses, extend credit or borrow money - the better.

Prepare for cash flow imbalances. For many companies it's normal to experience cash flow fluctuations throughout the year. Anticipate when your sales are likely to drop. Then make sure you've put some cash aside to cover your expenses during the lean months. If cash flow becomes dangerously tight, some more creative solutions can get you out of the crunch. Read Selling Receivables to Free Up Cash Flow to learn more about this process.

Seek professional help. If you don't think you can manage your company's cash flow yourself, hire a professional. An accountant can help you project your cash flow needs.

Many accounting software packages include modules to help you manage your cash flow. Learn more about this software in our Buyer's Guide to Cash Flow Management Tools.

Find tips on accounting software as well as payables and accounts receivable at AllBusiness.com.