Income Management – The Most Important Survival Tool For a Small Business

What do you think is the most important life blood of the business? Is it profit, sales development, or customer loyalty? While these are several important arteries of blood flow for a business to survive, they are not the guts which keeps the business alive. You can have just about all three and still go out of business should you not have the one thing all companies need to live; which is cash! It takes cash to pay your employees, turn the lights on, open the door, and maintain it open.

Having cash offered when you need it is crucial but you also have to understand how and when the cash flows in and out of your business. You just don’t “know” these things. There are skills involved to calculate, monitor, and manage cash.

How you can make cash flow work for you rather than towards you are summarized in the following five rules.

Know How to Measure It

First, understand the income or profit plus loss statement is not the same as cash flow. These are valuable analytical tools but only measure performance at a particular moment in time.

A cash flow statement, on the other hand, shows the movement of money in and out of your business over time. Consider this as a trend report. A balance sheet is the one other tool that measures money but again, only at a particular moment in time. It is just like a snapshot while the cash flow analysis is like a movie.

Know the Causes of Cash Flow Problems

Cash flow issues can occur in any number of business lifecycles. Most commonly they occur in investing or receiving. Makes sense, since cash flow is cash coming in and cash going out.

If you want to grow, you have to purchase things like people, equipment, facilities, or even inventory and that takes money out of the business. On the other hand, your clients could be slow paying and your company are not able to create enough cash. A cash flow trend sheet can forewarn you of these needs for cash. If you are facing rapid growth, declining sales, or long collection cycles consider yourself prepared.

A cash flow analysis can also show you cycles in your business. This can be a valuable forecast of company expenditures like marketing costs to aid a big sale. If the sale is really a success then you will see cash enter into the business and you can form a plan to make use of it for continued growth. By tracking and trending the business cash flow by month, it will make it easier for you to plan your business next year.

Create Strategies That Can Maximize Cash Flow

One key here is to minimize fixed expenses. Call suppliers and see if you can obtain a discount. Find a way to handle spikes in your business without hiring additional people. Minimize your cash needs and preserve cash in the business.

Consider non-cash intense payment options. Have you ever tried bartering? Make sure you are using business credit cards that will award travel points to minimize cash expenditures on future business trips.

Establish clear payment terms and expectations with your customers and have the formal receivable collection process in position. Consider discounts for prepayment or require a deposit for large buys.

Prepare For the Worst

When you see the trend that is restricting a positive cash flow, then you need to have tools at hand to correct the problem, fast. When developing a plan to infuse cash into the business, make sure you line up the sources for the appropriate use. For instance, short term cash troubles can be handled with credit cards or even a line of credit. Longer cash flow needs could be financed through long term secured loans or perhaps a capital loan.

Other ways to improve income might be to improve inventory turn and carry a lower supply of inventory. Be sure you have no cash sitting around; deposit checks the same day you receive all of them. Avoid slow paying customers. Create slow pay customers pay their bill before placing another purchase. Pay your bills on the last date they are due.
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Consider renting instead of purchasing equipment.

Grow Sensible

Do a business plan and an income forecast, by month, at the start of every year. Post your actual cash in/cash out accounts at the end of each month. Policy for growth. Ideally, every cash costs should generate cash in return. It could take a few months or years but a good return on investment is the purpose of any development strategy. Make a complete analysis about how exactly much you have to spend to meet development opportunities and how long it will be before you will be able to pay it back; more importantly, how you can pay it back.

So in the end, your business complements the flow, cash flow that is. If it’s positive, survival will most likely continue. If it’s negative, your business will be terminal. Is actually only a matter of time.

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