aThis guide will help you to manage your cash flow and understand how to use cash flow analysis to inform business decisions.

Your cash flow is the money you have coming in from revenue and going out for expenses. Good cash flow management will ensure you always have money available for paying your expenses when they are due.

A positive cash flow indicates that you’ve found an appropriate balance between the money your business is earning and what it’s spending. A negative cash flow, could suggest that your expenses are too high or that your customers aren’t paying their invoices when they are due (late). Being aware of your cash flow position can allow you to identify trends and potential trouble spots within your budget or business model.

Even profitable businesses can fail if cash flow is not managed properly. If you don’t have enough money available to pay your lenders or suppliers, banks may foreclose and suppliers could cut supplies.

There are many areas in your business that can have an impact on your cash flow. It is important to understand how customer payment terms, supplier payment terms, loan payments, future spending decisions and other items can affect your cash flow.

Failing to monitor and manage your cash flow properly puts your business at risk and could lead to a range of different problems. Here are some of the main issues you might face:

Late Payments: Cash is needed to pay your company’s expenses and bills. If you don’t have cash available, you may be forced to take on additional loans or make late payments. This can lead to late payment fees which can also damage your reputation.

Stymied Growth: Restricted cash flow gets in the way of advancing your business through investments or other opportunities down the road. You may miss out on opportunities to acquire new buildings and assets at discounted prices, hire new talented employees , get bulk discounts on supplies and pay for services your business uses.

Dented Credit Ratings: Frequent defaults on short and long-term obligations dents your company’s credit ratings. The dip in credit ratings relegates your business to a risky borrower, which causes it to lose favor with suppliers and lenders, making them reluctant to advance credit to your business.

Overspending: It’s very tempting to go on a spending spree when you win a new client – snapping up everything from fancy orthopedic chairs to an office foosball table. However, you need to remember that you haven’t actually got the money until they’ve paid you. Spending money that you don’t have is never the best idea.

Fortunately, there are effective solutions for good cash flow management which I’d like to highlight below:

Build cash up in fat times so you can use it in lean times: You will have cash shortfalls at some point in your business. Your business’s survival may depend on how you maneuver through those shortfalls and how fast you do it. If you start with some cash in your bank account, it will be easier to focus on cash flow and you won’t stress about the shortfalls vs starting with nothing.

Encourage customers to pay up faster: Offer your customers early payment discounts and keep credit requirements strict, with little negotiation. Establish a written set of standards for determining who is eligible for credit. Enforce those standards rigidly.

Designate a cash flow overseer: Assign the task of monitoring cash flow to a trustworthy employee who has been with your company for a good amount of time. Have that person inform you when you reach a certain threshold — for instance, when your cash flow hits R50 000 or less.

Use technology to your advantage: Keep cash flow spreadsheets in the cloud (online) sites such as Dropbox or OneDrive allow you to access them from anywhere.

Get a business line of credit (before you need one).

A business line of credit is a good plan B against cash flow problems. You may be able to get a line of credit for a percentage of your accounts receivable or inventory if you use them as collateral.

Deposit cash balances in interest-earning accounts: Interest-earning checking accounts are available at most large banks today, with a minimum balance requirement.

Lease equipment instead of buying it: By leasing vehicles, computers and other business equipment, you get access to the latest features and avoid tying up cash—but you still get to expense the lease costs on your business taxes.

Disclaimer:

This article is for information purposes only and you are advised to seek professional advice from your own accountant as your individual situation will vary.