5 rules for managing cash flow more effectively

Business experts say that one of the most common reasons that small businesses fail is that they run out of cash. Therefore, I believe that even before you start a small business, you should plan your cash management strategies. Based on my experience, here are five rules for managing cash flow more effectively at any small business.

Make a Cash Flow Budget

You probably make a budget for your small business showing revenue and expenses for the coming quarter and year. However, this budget may not reflect the timing of cash into and out of the business.

Therefore, in my opinion, it is critical to make cash flow projections as well. These projections should show when you expect cash to flow in, based on your contractual agreements, payment terms with your customers and other factors, and when you expect to have to disburse cash to cover operating costs and other expenses.

These projections will help you determine whether your cash flow is likely to be sufficient to cover your business's cash requirements. If not, they can alert you to the need for additional sources of cash, which could include equity investments or loans.

Keep Costs Low

I have found that, especially when your business is young, it is important to keep a tight lid on cash costs so that you can minimize overhead. Perhaps you can operate your business from home or, if that isn't feasible, share office space; lease rather than buy furniture and equipment; do your own bookkeeping; and take advantage of low-cost marketing opportunities on the Internet. My experience is that it is much easier to add to your overhead as your business grows than to try to cut back because your expense structure has gotten ahead of your revenue.

Make Collections a Priority

Cash tied up in accounts receivable is cash not available to invest in your business, so have a disciplined collections program. Send invoices out promptly, track outstanding accounts receivable diligently, and respond to late payments immediately. As the business owner, take a hands-on approach to this process so that your customers know that you take it seriously.

Manage Payables to Conserve Cash

I think that, for a small business, it is essential to establish a reputation as financially responsible by paying bills on time. At the same time, I don't believe that there is an advantage to paying bills sooner than you have to, so pay your bills when they are due, not sooner. Also, once you have established a record as a reliable, on-time payer, ask clients for extended terms.

Have Cash Reserves

My experience as a small business owner has taught me that cash projections can prove to be inaccurate, demand can decline unexpectedly, a good client can run into financial difficulties, or some other unexpected event can result in less-than-expected cash flow. For a small business this can be fatal if it doesn't have other resources to fall back on. Therefore, be sure that your small business has a cash cushion it can rely on in a financial emergency. This could be cash in the bank, a line of credit or other borrowing facility, or even a credit card.


Sources:

smallbusiness.intuit.com, "Managing Cash Flow for Small Businesses"

Jenny C. McCune, www.bankrate.com, "Small Business: 10 Tricks to Keeping Your Cash Flow Healthy"

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