Ways entrepreneurs can conquer cash flow challenges

As an entrepreneur, you have a lot on your plate as you build your business. Several concerns will vie for your attention every day, but of them all, perhaps the most important—and potentially the most challenging—will be cash flow management.

Understanding cash flow is vital to the ongoing success of your business, but the average entrepreneur is not terribly experienced in formal accounting, and rarely has any sort of financial background, which help to explain why so many organizations can face financial difficulties at one time or another.

Fortunately, these difficulties can be overcome with the proper strategies and good financial management. Keep reading to see how entrepreneurs can overcome cash flow challenges.

Start With the Basics

It’s important to have a grasp of the basic concepts of cash flow and what it means for your company. A cash flow statement is roughly equivalent to the information that you would have in your own bank book. It details the flow of money, into and out of your business or project, just as your bank book shows the money you deposit and withdraw from your personal account. The balance in your account at any given time would be the net cash flow.

A cash flow statement, then, shows all the cash flows that took place over a particular period of time, while a cash flow budget would be an estimation of future deposits and withdrawals.

The cash flow statement involves more than simply tracking the amount of money moving in and out of your business, however. It also takes into the account the timing of cash movement, allowing you to forecast your monthly cash balance, as well as the anticipated balance at year’s end.

Working capital is another aspect of cash flow analysis and is, in essence, the amount of money needed to continue operations. This is calculated as the amount left over upon subtracting your current liabilities from your current assets and is an indication of the liquidity of your business over a future period of time.

Upon calculating your working capital, if it appears to be reasonable to your needs, you may not be in urgent need of developing a cash flow budget, but if it seems insufficient, creating a budget may help in predicting liquidity problems that may arise over the course of the coming year.

If you are concerned about your ability to make sense of cash flow analysis, you needn’t worry; this is the reason for hiring a qualified accountant or CFO, who would be able to interpret your financial information. What matters most is that you have the ability to read cash flow statements and balance sheets in order to make decisions accordingly.

Tracking Your Revenue

It’s vital that your cash flow statement be able to forecast revenue. Seasonal fluctuations should be watched closely, as they could result in difficulties later on. If your business earns the majority of its revenue during a particular period each year, you will need to know to manage resources carefully throughout the rest of the year to avoid a cash flow crunch.

Keep an Eye on Expenditures

Your spending needs to be monitored, and it’s important to differentiate between your discretionary and non-discretionary spending. In many cases, this is fairly simple, as with rent, wages, and certain other expenditures. Where it may be less clear is in regard to advertising, or promotion, such as expenses related to wooing a potential customer.

Create a marketing plan. Determine your target audience and create a strategy that will reach them in the most effective manner while taking into account budgetary constraints. Set goals and know your expectations for your marketing so that you can measure its efficacy. This lets you turn a discretionary expenditure into an important part of building your business.

Collect Your Receivables

Virtually every company deals with late payments and the need for collections. Typically, out of every 10 new customers acquired, 2 will pay late and 2 others will be sent to collections. That means that up to 40% of your new clients could negatively impact your cash flow, and for this reason it is important that you stay on top of your invoicing and collections. Some tips for doing so include:

• Familiarity with your customer’s credit history. Do not offer credit unless you are confident of repayment. A deposit should also be required from new customers.
• Pay attention to credit terms that you offer. An easy way to collect is to do so before delivery of your product. For example, as a custom manufacturer, you may require 50% before beginning work and 40% before delivery, with the final 10% due after delivery.
• Check references for each new client.
• Define the minimum order that will require a credit check.
• Invoice within 24 to 48 hours of delivering a product or service and always ensure the accuracy of invoices and payment terms.

By far, however, the most important aspect of overcoming cash flow challenges is to be constantly monitoring your finances and working with your financial team. Cash flow challenges can appear quickly, so it is vital that you do all you can to spot them before they arise.

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