Improving cash flow in your business can have a dramatic impact on your future success, especially during start-up. When you’re new to business, cash can be tight and difficult to manage — strategically reinvesting what you do make is vital to staying afloat and actually getting your new business off the ground.
As a business consultant, I’ve helped numerous clients get clear on how to manage their cash flow both in the early stages of start-up and later on in business. To learn more about my expert tips for smart cash flow management, keep reading!
What is cash flow management?
Cash flow management is the amount of money (cash and sales) traveling in and out of a business. A positive cash flow means more money is coming into the business than going out, whereas a negative cash flow means the business is spending more than the money than is coming in.
The simplest way to calculate cash flow is to assess the cash available at the beginning and at the end of a specific period (typically a week or a month). If there is more in the account at the end of the period than when the period began, the business has a positive cash flow; it will have a negative cash flow if there is less cash at the end.
It’s important to remember that cash flow and profitability are NOT the same thing. A profitable business can still be unable to meet financial commitments or pay bills.
Why is cash flow management important?
There are a number of reasons why managing your cash flow is important. Let’s break them down:
Tracking your cash flow allows you to spot gaps and shortfalls in advance and plan for them. The more diligent you are about managing your cash flow, the more noticeable these shortfalls will be.
A huge source of stress for many new entrepreneurs is not having a clear picture of their business’s financial situation. This stress is majorly alleviated when you take the time to manage your cash flow, as you always know exactly what your business stands (even if it isn’t always great).
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Know how much to spend on growth.
Having such a clear picture of your finances means that you can look at your cash flow over weeks or months and know exactly what you can spend on growth and what needs to be set aside for other business expenses or stashed away for a rainy day.
Strong cash flow management gives you leverage if you ever need support from external sources, like the bank or investors. Being able to demonstrate this kind of strategic planning is a huge source of credibility in the situations where you need to prove trust the most.
Cash flow is infinitely more accurate than simply going off of a budget. Budgets can be taken over by wishful thinking or inaccurate predictions, whereas cash flow projections relay what is actually happening for your business financially in the here and now. It is ALWAYS better to have accurate numbers than optimistic ones.
How to manage cash flow at start-up
Now that we’ve gone over what cash flow management is and why it’s so critical to your business, it’s time to break down the “how” behind it all. I’ll be walking you through a simple method that will allow you to manage your cash flow effectively and without overwhelm.
Your first step is to determine where you will track your cash flow. There are many paid tools out there that you can use to do this, but creating a Google Sheets spreadsheet is free and works just as well for our purposes. Even though it’s a manual process, it’s easy to adapt to your specific needs, too.
Once you have your tracking method of choice all set up, here’s what to do:
Step 1: Forecast Expenses
Your first step is to lay out all of your expenses. You’ll want to make a list of everything you need to pay for, from rent to ads to business software to paying team members — anything that comes out of your bottom line should be included. Be sure to mention what the expense is for, how much it costs, and when payment is due. Reviewing your credit card and bank statements is crucial during this stage.
Step 2: Forecast Revenue
Your next step is to forecast your expected weekly revenue. If you’re still relatively new to business, this may be tricky due to fluctuations in sales. Try to be as accurate as possible, but don’t beat yourself up too much over it. This will naturally get easier the longer you are in business. Here are two pointers:
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Write down any guaranteed revenue. If you have people on payment plans, long-term contracts, or ongoing subscriptions, you’ll have a good idea of what you should be receiving. From there, you can estimate if those numbers will change (either go up or down) or stay the same.
- It’s also a good idea to look at past data to assist projections. Historical data can help you take annual cycles and seasonality into account and give you a more nuanced, data-driven perspective of how to forecast your future revenue.
As you go about this step, remember to take into account important factors that could affect your sales like holidays, time of year, promotions or discounts, and so on.
Step 3: Plug Your Data In & Update It Regularly
Once you have your numbers, it’s time to input them into your spreadsheet or tracking method of choice. You want to stay on top of this process weekly — I recommend adding revenue to the week it will become available to you. Keep in mind that it may take a few days to end up in your bank account. Be sure to fill in all of your expenses as well.
The most important thing when it comes to tracking your cash flow is to update it regularly. Once a week, check in on your cash flow spreadsheet and compare it to the actual numbers in your account to ensure that things add up.
My Top Advice for Improving Cash Flow
If your business is currently dealing with poor cash flow management, here is what I would assess and focus on as a business consultant:
Managing your cash flow as a start-up owner is absolutely critical to experiencing success in the future. As a business and marketing consultant, it’s my job to help you figure out a smart, strategic approach to cash flow management that will propel you forward financially. If you crave actionable support and strategy in this area, click here to learn more about booking a strategy session.