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In the Know About Cash Flow

3 min read

When it comes to cash flow, the right methods can make or break a business. Ensuring your business is keeping up with the ebb and flow of funds can be one of the most difficult areas for a new business to master.

Mastering cash flow, or managing where the business’s money comes from and where it’s going, is all about keeping track.

Janell Reeves (ASBTDC)

“You’re not only just tracking it, you’re making decisions about where it’s going to go,” said Janell Reeves, the director of Southern Arkansas University’s branch of the Arkansas Small Business and Technology Development Center. “It’s not just letting the inflows happen as they may — it’s all about controlling it and being intentional with it. It’s not budgeting; this is something that is ongoing and consistent.”

Ultimately, what comes in, must go out, whether to employees, insurance and rent payments or other business needs.

Part of managing a business’s cash flow is to have a set amount of cash on hand in an emergency fund of sorts. A general rule of thumb is to have anywhere from three to six month’s worth of expenses on hand at any given time. But this isn’t always the case, according to TJ Boyle, a CPA with Frost, PLLC in Little Rock.

“The idea of cash on hand is a little bit of a question related to comfortability and your risk tolerance,” Boyle said. “It really needs to be a formalized business plan to understand both when cash flow will come in as you’re a maturing business, but also the level capital. You need to be able to put the dollars down on paper… to understand when you need it to match up with what you actually expect for your numbers.”

It’s important for business owners to be honest with themselves when anticipating their numbers. Truly consider when the business will make the sales and if anyone is willing to buy the products at their current prices.

“Create a cash flow forecast. Don’t rely on luck to steer clear of unforeseen financial obstacles and disruptions in your… business operations,” Reeves said. “When facing cash flow trouble, create a solution for the moment that aligns with your long-term goals.”

Cash Flow and Growth

As your business grows, the cash flow management system you have in place will need to grow with it.

For example, if a company is building up inventory, it has to take extra costs into consideration.

“When you’re selling something, think about all the additional costs that go into the product that you’re selling,” Boyle said. “It’s not just direct costs; it’s going to be overhead or rent, and that’s where we look at two different forms of costs. You’ve got your direct cost of product, but then you’ve got your overall cost. Are you recovering all your overhead and all your ancillary cost when you’re pricing your product?”

Keeping the Flow Going

1. Regularly monitor cash

Track the business’s incoming and outgoing transactions and identify patterns or trends. By staying informed, business owners can anticipate possible shortages or surpluses and take precautionary measures to properly address them. An experienced accountant can help business owners get a solid understanding of the business’s cash flow statement.

2. Make predictions

Cross-reference your historical data and current trends with anticipated changes in the business. Consider factors such as the payment history of returning clients (do they get their payments in on time?), whether the business is more seasonal in nature and upcoming purchases. By taking these factors into account, business leaders will be able to know whether the company needs to adjust its spending or secure additional financing.

3. Find ways to improve

Once challenges to the business’s cash flow system have been identified, leaders can implement strategies for improvement. For some businesses, this could look like streamlining accounts receivable processes or optimizing inventory management to lessen carrying costs. If the best path would be to consider alternative financing, business owners should consult with their advisors to find the best way to avoid short-term cash flow gaps while maintaining reserves.

4. Revisit often

Monitoring your cash flow should be a regular part of business operations. Cash flow performance will vary, and strategies will occasionally need to be adjusted.

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