How to Plan for Better Cash Flow

Whether you’re a start-up or a multi-million-dollar business, cash flow is always challenging. Money flows in and out of most businesses in a stream that’s not always as steady as we hope. When money moves in too slowly and out too fast, businesses can often find themselves in major trouble. That’s why tracking and planning for cash flow is one of the most important steps we can take to protect our businesses.

What is Cash Flow?

The short answer is that cash flow is the amount of money coming in and going out of your business. It’s literally money that ‘flows’ in and out of your company. It’s very important to remember that cash flow includes money going out of your company. There are two types of cash flow:

· Cash inflow is when money comes into the company. This could be from customers, clients, or investors.

· Cash outflow is when you pay money to someone outside the company. Common payments include expenses like rent, stock, or employee wages.

When your cash inflow is higher than your cash outflow you have positive cash flow and your business is making a profit. But if your cash outflow is higher than your inflow, you have negative cash flow, which means you’re losing money and can be dangerous for the health of your business.

Positive Cash Flow Isn’t Profit

It’s important not to confuse cash flow with profits. You may be making excellent profit, but still have a negative cash flow. For example, if your profits increase month-to-month for three months, but you decide to pursue an expansion at the same time, the money spent on setting up a new product or service could mean you still have negative cash flow.

Additionally, money moving into your company isn’t necessarily from income. And money out doesn’t necessarily go toward operating expenses. If you’ve infused your business with a loan, it’s not profit, but it is increasing your cash flow. Conversely, you can have a profit but a negative cash flow if you take money out of your company to pay for personal expenses.

Why Does it Matter?

Your cash flow can determine the success of your business in the long term. Small businesses need to be especially conscious of their cash flow if they want to remain in business. Many businesses fail because they fall into a negative cycle of cash flow.

When there isn’t enough money in the bank to sustain possible future needs, there’s a good chance a business could fail.

If you have a solid positive cash flow you can afford to keep your business running. But if your business lacks cash flow you may start to fall behind on your expenses.

Maintain a Positive Cash Flow

Maintaining a positive cash flow is particularly important for businesses that require stock and pay employees. These are typically fairly large recurring expenses that are required to keep the business running. When these payments get stopped up, so does the work that brings more money into the business.

There are a few ways to maintain a positive cash flow so you can stress less and focus more on your business: · Find out where your cash flow stands right now. Take the cash flow quiz to find out.

• Stay organized. By being organized you can keep track of the money you already have, the money you’re earning, and the money you owe and will owe. Stay on top of your budget.
• Make a plan. Consider every source of income and expense. Decide how you’re going to pay and how you’re going to maintain your income. Making a plan will prepare you for payments.
• Plan for surprises and have some money set aside. It’s typically not everyday cash flow issues that stop up cash flow. Instead, it’s the emergencies or unusual bills that can suddenly add up. Have some extra cash put aside for those times – kind of like a rainy-day fund for your business.
• Get paid. Send out invoices to your customers or clients as soon as possible and make sure they pay you on time. You can’t afford to stay in business if you don’t get paid.