How to Manage Cash Flow Year-Round, Through Ups and Downs
Learning how to manage cash flow is arguably the most important financial skill for business owners. Earning a profit on paper is great — but if you don't have money to pay the bills when they come in, you'll be in trouble. Planning for the ups and downs of your business cycle allows you to make better decisions with your cash throughout the year.
Focus On the Entire Year
When business owners track cash flow, they're more focused on short-term changes that happen each week and month. That makes sense. Your day-to-day operations have to be a priority. But while short-term results are important, you should also track how your cash flow changes throughout the year so you can create a long-term plan and look for patterns.
Check for Patterns
As you track your cash flow over time, chances are you'll notice some patterns. Do you have seasonal peaks with lots of business? Are there some months when you have more cash than others? If you went through these cycles in the past, chances are they'll happen again. You can figure out how to better react the next time around.
You should also check the timing of cash inflows versus outflows. At what point in the month/quarter do you typically get paid by clients versus when you need to pay your bills? For example, if most of your expenses happen mid-month but you usually don't get paid until the end of the month, you should keep a cash reserve until the money comes back in.
Forecast for the Future
While tracking past cash flow is helpful for finding patterns, you should also look to the future with a cash flow forecast. Your forecast should look at the upcoming weeks or months to predict how your cash position will change based on your expected invoices minus your expenses, payroll and other future cash outflows.
The forecast lets you anticipate when money will get tight and when your business will be flush so you can strategize. Every few weeks, compare your forecast and your actual results. How close was your prediction? What was different? Use this information to fine-tune your next forecast.
Handling Cash Crunches
When cash is tight, be more conservative with spending. Hold off on paying suppliers until their payment deadline. You should also delay stocking up on inventory and buying new equipment. This way you'll preserve your cash until things pick up again.
During these stretches, work to get paid as quickly as possible from your customers, like offering discounts for early payment or sending frequent reminders to anyone who is late. If a customer can't pay the full amount, ask for partial payment.
If you have more inventory and construction materials than needed for upcoming projects, consider selling the excess. Not only will this bring in some extra cash, but it also cuts down your storage costs.
Finally, when you see a cash crunch coming, consider setting up a business line of credit before it hits. This way you'll have another source of funding ready before you run into financial trouble.
Maximizing Good Times
When you're flush with cash, that's the time to repair and buy equipment, stock up on inventory for upcoming projects and increase your marketing. If you have suppliers, ask if they would give you a discount for paying early. This way you put your extra cash to good use, rather than keeping it in the bank where it earns practically nothing.
You should also note how long the good cash flow stretch is expected to last based on your forecast. Don't keep spending as if it will last forever. You should start saving now to get ready for the next cash crunch.
Don't let cash flow swings catch you off guard. By following this advice on how to manage cash flow, you'll be in good shape through the ups and downs of your business cycle.