How Important is Cash Flow For Your Business?
Cash Flow is essentially the cycle of cash inflows and outflows and determines your business’s ability to operate efficiently. One of the greatest challenges that business owners face is maintaining Positive Cash Flow.
COMMON NEGATIVE CASH FLOW PROBLEMS
- Unpaid Receivables
- Obsolete Inventory
- Excess Spending
- Not Maintaining a Budget
- Service Prices may be too Low
SOLUTIONS TO PREVENT NEGATIVE CASH FLOW
- Invoice your customers and collect payment as soon as the agreement allows. The clearer you are about due dates and expectations, the more likely customers will pay on time.
- Inventory that is taking up shelf space does not bode well for your business. Calculate your Inventory Turnover Ratio, to find the perfect time to order inventory so it is not sitting on the shelf space.
- Take time to re-evaluate your expenses. Analyze the past six months and identify where your heaviest financial burdens are in your business.
- An enforceable Budget can do wonders for a business. Identifying Projected Revenue and Expenses can allow you to keep track of how you are doing throughout the year. Keep it conservative and treat it as a goal for your business and something to celebrate when you hit certain benchmarks.
- It is recommended to look at industry standard prices at least once per year to identify if you are below or above the industry standard to make sure you are at the right price point for your customers.
USE THE BREAKEVEN ANALYSIS
A great exercise for this is breakeven analysis. In this exercise, we look at the level of fixed costs relative to the profit earned to see if the revenue will essentially cover the minimum amount of expenses to operate.
From that, we can determine if there are any variable expenses related to the revenue that will affect the breakeven point. To get started on the right path in the next calendar year, we will be providing a free breakeven analysis in the month of November 2019. If you are interested in this, please feel free to reach out to us to get on the schedule.
DON’T FORGET TO SAVE FOR QUARTERLY TAXES
As a precaution, always try to save at least 25% of your Gross Profit for Estimated Quarterly Taxes and Business Investment Vehicles (Self-Employed IRA and Solo 401K). While normally Gross Profit could be calculated differently depending on the industry, a summary would be Revenue less any expenses associated with generating that revenue.
After savings for Taxes, it is recommended to maintain an account balance equivalent to at least two months of operating expenses. If there are any unexpected slow periods during the year, there will be reserves in place to safeguard your business.