Cash flow is the pattern of income and expenditures of a company. The cash flow statement enables you to track cash as it flows in and out of your business and reveals to you the causes of cash flow shortfalls and surpluses.
Cash flow is the lifeblood of any business, and it’s imperative that you understand the inflows and outflows accordingly.
So let’s take a closer look at just how cash flow works:
Cash is generated into a business through:
- Sales of your product or service
- Loan or credit card proceeds
- Asset sales
- Owner investments
Cash flows out of a business through:
- Business expenditures
- Loan or credit card principal payments
- Asset purchases
- Owner withdrawals
These cash inflows and outflows can be categorised into three main business parts:
- Operating, which covers sales and business expenditures
- Investing, which covers asset sales and purchases
- Financing, which covers loan payments and proceeds, and owner investments and withdrawals
How to manage cash income more effectively
When you’re managing a growing company, you have to watch expenses carefully.
Don’t be lulled into complacency by seeing sales increase. Any time and any place you see expenses growing faster than sales, examine your costs carefully to find places to cut or control them.
Here are some more tips for using cash wisely:
- Take full advantage of creditor payment terms. If a payment is due in 30 days, don’t pay it in 15 days.
- Use electronic funds transfer to make payments on the last day they are due. You will remain current with suppliers while retaining use of your funds for as long as possible.
- Communicate with your suppliers so they know your financial situation. If you ever need to delay a payment, you will need their trust and understanding.
- Carefully consider vendors’ offers of discounts for earlier payments. These can amount to expensive loans to your suppliers, or they may provide you with a chance to reduce overall costs. The devil is in the details.
- Do not always focus on the lowest price when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow more than a bargain-basement price.
- Develop discipline and curb spending. You have already taken a big risk by starting your own business. The last thing you need for your business is a financial loss. An accountant or business financial planner can intelligently guide you through the necessary steps to reach your financial goals, but if you do not have self discipline, all efforts to reach financial fitness will be in vain.
Learning to cultivate the trait of self-discipline is one of the most important success skills you can develop. There are many aids you can use to develop self control which can be found on the Internet, through self-help books, guides and support groups.
Start with a budget
Any hope of curbing your spending must begin with a realistic budget or spending plan. “The starting point to solve this problem is to set up a budget. Work out your earnings and then calculate your spending, this will show what you have and what you do not have”, advises Iain Mackenzie, Financial Planner at Pioneer Financial Planning.
Consult a professional
A certified financial adviser is a professional who can offer financial planning services to individuals and businesses. Ideally, the financial advisor helps the client maintain the desired balance of income and spending, although the onus is on the client. “The tough part is sticking to the budget. A financial advisor can put accounting practices and budgets in place, but they have no control over the personal discipline of their clients”, says Mackenzie.
“Further more a financial planner’s job is to firstly make sure that prospective clients can deal with their immediate costs and thereafter invest surplus funds in wealth creation and protection”.
Meet with potential business financial advisors and find out about their experience. The more experience and satisfied customers they have, the better. If the business financial advisor is very unfamiliar with your sort of business, then you should start searching again. Know what the business financial advisor will charge you for their services as you do not want any unexpected surprises when it comes to charges and fees.
