Run a business for any length of time, and the importance of cash flow becomes abundantly clear. When payroll is due, bills are piling up, and funds aren’t available, blood pressure tends to rise. For this reason, being able to forecast cash flow accurately is critical. Here are four ways to refine your approach:
Many businesses are cyclical, and their cash flow needs vary by month or season. Trouble can arise when an annual budget doesn’t reflect, for example, three months of peak production in the summer to fill holiday orders followed by a return to normal production in the fall.
For seasonal operations — such as homebuilders, farms, landscaping companies, and recreational facilities — using a one-size-fits-all approach can throw budgets off, sometimes drastically. To forecast your company’s cash flow needs and refine accordingly, track your peak sales and production times over as long a period as possible.
Effective cash flow management requires anticipating and capturing every expense and incoming payment, as well as — to the extent possible — the exact timing of each payable and receivable. But pinpointing exact costs and expenditures for every day of the week can be challenging.
Businesses can face an array of additional costs, overruns, and payment delays. Although inventorying every possible expense can be tedious and time-consuming, doing so can help avoid problems down the road.
As your business expands or contracts, a dedicated line of credit with a bank can help you meet cash flow needs, including any periodic shortages. Interest rates on these credit lines can be high compared to other types of loans. So, lines of credit typically are used to cover only short-term operational costs, such as payroll and supplies. They also may require significant collateral and personal guarantees from the company’s owners.
Of course, a line of credit isn’t your only outside funding option. Federally funded small business loans have been offered during the COVID-19 pandemic. These loans may still be available to you. Look into these and other options suitable to the size and needs of your company.
For many businesses, the biggest cash flow obstacle is slow collections. Be sure you’re invoicing promptly and offering easy, convenient ways for customers to pay (such as online). For new customers, perform a thorough credit check to avoid delayed payments and bad debts.
Another common obstacle is poor resource management. Redundant machinery, misguided investments, and oversized offices are just a few examples of poorly managed expenses and overhead that can negatively affect cash flow. For help reducing expenses and more effectively forecasting cash flow, please contact us.
For business owners, being able to accurately forecast cash flow is a mission-critical activity. Fortunately, there are ways to refine your approach. First, track your peak sales and production times over as long a period as possible. Know your busy season! Also, engage in careful accounting to anticipate and capture every expense and incoming payment. Note the timing of cash inflows and outflows as well. Keep a careful eye on additional funding sources, such as a line of credit or federally funded small business loan (if you qualify). Above all, stay on top of collections and always be on the lookout for ways to run leaner. Contact us for help with cash-flow forecasting and check out our Facebook Page.