Cash Flow Management 101

cashflow managementCash flow management – or making sure that there’s enough cash to pay expenses – is one of the most important things any business owner can do to ensure their success.

Without cash to pay creditors and salaries on the due date, even the most profitable business can land itself in financial trouble – let’s start with the basics of cash flow management to help you run your business smoothly.

Is your company profitable and strapped for cash?

Most business owners are keenly aware that making a profit is essential to the survival and growth of any company – and understandably, that’s what they tend to focus on.

If a small business does sales of R 100 000 a month and its total costs are R50 000, it should have a healthy profit of R50 000 a month to use for expansion, repay debts, or pay its owners a dividend – but yet, many small businesses always seem to be short of cash. The reason for this is an unhealthy cash flow situation.

What is cash flow all about?

If you look up cash flow in a business dictionary or accounting textbook, you’ll find a lot of complicated definitions and formulas. Simply put, cash flow takes place whenever money is received or spent by your business. Cash flow management is the process of making sure that there’s always enough cash on hand to cover your business expenses – let’s find out how.

Planning your business income and expenses

The easiest example of cash flow management is the household budget: if a salary earner gets paid on the 25th of the month, they need to have enough money on hand to pay their monthly expenses a few days later.  Hopefully, once those expenses are paid there is a small surplus left over for savings and investments.

In the case of a business, the situation is slightly different for two reasons – clients don’t always pay immediately and suppliers won’t always wait for their invoices to be paid. Your business may be waiting on R100 000 in payments from clients, but if your suppliers are demanding R50 000 in payments you may find yourself unable to pay them – that is a typical cash flow problem experienced by millions of business owners around the world.

How to keep your cash flow positive

To make sure that your cash flow remains positive – which means that you always have cash on hand to pay debts and accounts that are due – you’ll need to plan your company’s income and expenses in advance. Here are some strategies that any small business can use:

  • Know your expenses – you should have a fairly accurate idea of how much your company pays for rent, utilities, salaries, and fixed expenses each month.
  • Project your income – just as you know how much your business spends most months, you should have a list of your regular clients who pay on a monthly basis.
  • Do they balance? – if your basic expenses are more than your minimum income, you’ll have to pick up a lot of extra work each month to cover the difference – and make sure that clients pay on time.

If you have any questions about cash flow management, contact Northwood today. Our team will schedule a planning session and take you through the process step by step.

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