Managing Your Cash Flow! By Mike Gibson

A healthy cash flow is an essential part of any successful business. Some business people claim that a healthy cash flow is even more important than your business’s ability to deliver its goods or services! Consider this: If you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. But if you fail to have enough cash to pay your suppliers, creditors, or your employees, you’re out of business! No doubt about it, proper management of your cash flow is very important in making your business successful. Your profit is not the same as your cash flow. It’s possible to show a healthy profit, and yet face a significant money squeeze at various points.

Understanding cash flow is the first step to managing it. There’s more to it than just a fancy term for the movement of money in, and out of your business. It could be described as the process in which your business uses cash to generate goods or services for sale to customers, collects the cash from the sales, and then completes this cycle all over again.

Analyzing your cash inflows and outflows will help you spot some of the problem areas in your cash flow cycle. You need to look individually at each of the important components that make up your cash flow cycle, to determine if it’s a problem or not.

Inflows are the movement of money into your cash flow. Inflows are most likely from the sale of your goods or services to your customers. If you extend credit to your customers and allow them to charge the sale of the goods to their account, then an inflow occurs as you collect on the customers’ accounts. The proceeds from a bank loan are also a cash inflow.

Outflows are the movement of money out of your business. Outflows are generally the result of paying expenses. Your largest outflow is most likely to be for the purchase of inventory. Purchasing fixed assets, paying back loans, and paying accounts payable, are also cash outflows.

A cash flow budget is good way of predicting your business’s future cash flow and a handy tool to use to improvement and manage your cash flow. Improving your cash flow will, without a doubt, make your business more successful. Accelerating inflows and delaying outflows are key factors to improving and managing cash flow. From time to time, almost every business experiences the need for more cash than it has. If you find yourself in this position, you may have to borrow money to fill the gap. Handling any cash surplus is just as important as the management of money into and out of your cash flow cycle.

If you were able to do business in a perfect world, you’d probably like to have a cash sale occur every time you pay an expense. Instead, cash inflows and outflows occur at different times, and never actually occur together. More often than not, cash inflows lag behind your cash outflows, leaving you short of cash. Think of this money shortage as your cash flow gap. The cash flow gap represents an excessive outflow of cash that may not be covered by a cash inflow for sometime in the future. Managing your cash flow by measuring it, Improving your Receivables, Managing your Payables, and Planning in advance for Shortfalls allows you to narrow or completely close your cash flow gap. It does this by examining the different items that affect the cash flow of your business and allows you to answer the following questions:

How much cash does my business have?
How much cash does my business need to operate, and when is it needed?
How much cash does my business have coming due, and when will it come in?
Where does my business get its cash, and spend its cash?
How do my income and expenses affect the amount of cash I need to expand my business?

If you can answer these questions, you’re managing your cash flow!

If you would like to know more about improving your cash flow contact me, I have a cash flow budget model to help you, and we will begin working together to increase your cash flow. As a Certified Bookkeeper and Certified QuickBooks ProAdvisor I can also offer you help with Bookkeeping or Payroll Service. Contact me today for a free consultation.

American Institute of Professional Bookkeepers, “Managing your Cash Flow”, May 2008
Business Owner’s Toolkit, “Managing Your Business’s Cash Flow, May 2012




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