How Do You Manage Cash Flow Effectively?
Diving into the entrepreneurial world requires a keen eye on financial health, so we've gathered seven seasoned CEOs and directors to share their wisdom on managing cash flow. From monitoring payable invoices and receivables to keeping fixed costs low and managing receivables, these experts provide invaluable advice for new entrepreneurs navigating the fiscal waters.
- Monitor Payable Invoices and Receivables
- Maintain a Six-Month Savings Buffer
- Prioritize Proactive Cash Flow Planning
- Normalize Line of Credit Costs
- Invest in Skilled Employees
- Track Revenue and Spending Regularly
- Keep Fixed Costs Low, Manage Receivables
Monitor Payable Invoices and Receivables
Picture cash flow as your business's pulse, giving you a quick insight into the health of your venture. To keep the pulse steady, always stay on top of your payable invoices and expedite your receivables. Remember, your customers' financial habits can greatly impact your cash flow—if they're slow to pay, you'll have less to reinvest or manage unexpected costs. Don't let your company's pulse falter because of delayed payments! You're the heart of the business; make sure the blood flows where it needs to.
Maintain a Six-Month Savings Buffer
Don't spend it all at once. I remember when I received my first business credit. I had never had access to that level of financial resources before. I was dreaming big, and I thought that I needed to buy everything from the get-go to even get started. It was, of course, a terrible plan, as soon the unexpected happened, reality hit, and I was already out of cash. Spend with caution. I'd suggest at least six months' worth of operating costs in savings. All new businesses come with their fair share of surprises; be prepared for them.
Prioritize Proactive Cash Flow Planning
If I were to offer a single piece of advice to new entrepreneurs about managing cash flow effectively, it would be to prioritize proactive planning and regular monitoring. Establishing a detailed cash-flow forecast and budgeting process can provide invaluable insights into your business's financial health and help you anticipate potential cash shortages or surpluses. By regularly reviewing your cash-flow statement and adjusting your plans accordingly, you can make informed decisions to optimize your cash flow and ensure the long-term sustainability of your business. Additionally, maintaining open lines of communication with suppliers, customers, and lenders can help you navigate any unexpected cash-flow challenges that may arise.
Normalize Line of Credit Costs
This is just par for the course for most small businesses. Honestly, this is mostly a perspective/psychological issue. You just have to try to normalize the cost of using your line of credit to smooth your cash flow as a part of your operating expenses. Build it into your annual budget, then when you are carrying that credit and interest, you already have a line item paying for it. Shop around for more competitive credit lines, and also take a look at invoice factoring as another alternative. Some companies also offer discounts for paying bills quicker than the net-30, so you could consider if that makes sense for you.
The reality is a whole lot of businesses have lumpy revenue against more constant expenses and use these cash flow tools without batting an eye because they just consider the cost of the credit as just another business expense.
Invest in Skilled Employees
Investing in your team is crucial to maximizing income and expediting revenue generation, all while considering immediate financial needs. Many companies tend to skimp on people resources to accommodate other expenses, but investing in skilled employees has more benefits in the long term than any other non-human resource a company can have.
Track Revenue and Spending Regularly
One piece of advice that I'd give new entrepreneurs about managing cash flow effectively is to track revenue and spending. This helps entrepreneurs predict their upcoming outgoing expenses. Being updated about your financial situation will help you plan strategies and workflows, such as getting a loan or arranging supplier payments.
Keep Fixed Costs Low, Manage Receivables
My single piece of advice for new entrepreneurs about managing cash flow is to maintain a lean operation by keeping fixed costs low and focusing on variable costs that align directly with sales performance. Additionally, always stay on top of invoicing and actively manage your receivables to ensure consistent cash flow.
