One of the biggest challenges facing any small business owner today is financial planning. It can be a sticky and somewhat boring subject for many, but significant challenges can arise out of nowhere without adequate planning. So what steps can you take to help you project and adequately manage your cash flow, which is at the centre of your financial universe?
Understanding the Difference between Profit and Cash Flow
Looking at a straightforward monthly profit and loss may show that the business is earning more than it spends and therefore returning a nice profit. Yet that document does not show you what's happening in the bank account every day of a given month. And this is where issues can arise, as there is usually a difference in the way that money comes in and goes out.
You need to ensure that you have a positive cash flow every day of the month and not only at the end when you generate a profit and loss document. Otherwise, you might not have enough money in the bank account to cover a significant bill when it arrives.
Projecting When Bills Are Due
Clearly, you must understand your profitability and ensure that you make more money than you spend as time passes. But you must also maintain a clear schedule showing when individual bills are due. Then, you'll need to ensure that there is enough money in the bank account to cover those bills, even though you may not have received payment for certain goods or services.
Creating a Cash Flow Forecast
To do this, you must create a cash flow forecast, ideally for the year ahead. You will then break this down into quarters and months to ensure enough padding in your bank account to cover all eventualities.
Reassessing Profitability
If your business is facing a cash flow crunch, take another look at your profit projections. Are you sure that you're charging enough for your goods or services? Could you reduce some overhead costs or renegotiate supply contracts? Do you need to transfer money from one resource into your working bank account so there is always enough liquidity?
Getting Guidance
Some of these questions can be very challenging for some business owners, especially those who do not have professionals to give advice. If you find yourself in this situation, reach out to a local commercial accounting service to find out more info.
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