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The Basics of Cash Flow and Managing it Effectively

June 12, 2019

Money isn’t everything, but it is a significant factor for just about anything you can imagine — and it's critical in business.

You inevitably build up the costs, and no amount of ebullience or can-do spirit will account for missed payment (the albatross around the neck of the doomed startup).

Missed payment? Don’t I mean a lack of profit or something similar? Nope. Profits are great (and essential in the long run, naturally), but you can endure without it for a spell. Cash flow, however, is an immediate concern: something that can sink you in a brutal fashion.

cash flow basics

Image courtesy of Pixabay

So what’s cash flow about, and how can you get a handle on it? Let’s take a look at the basics of this vital accounting element, and set out some tips for being smarter with money:

What cash flow actually means

In essence, cash flow is the money you’ve receiving stacked up against the money you’re losing through regular expenses. This Wave cash flow guide rigorously sets out the details if you’re interested, but for now let’s indulge in a fun analogy to explain why it’s so important:

Imagine you’re setting out to run a marathon (a fairly apt comparison when running a business, since it’s all about steady progress towards a distant goal). If you’ve trained properly, your body’s conversion of stored energy reserves into athletic prowess will be smooth and productive — your stride will be powerful and fluid, getting you ahead most economically.

But then there’s your breathing: taking oxygen in, and breathing carbon dioxide out. With all the focus on your muscles and cardiovascular fitness, you forgot to regulate your breathing, and you suddenly find yourself gasping. Your muscles scream, unable to perform without adequate oxygen supply, and your body gives up the ghost.

In short, it doesn’t matter how good your business model is — if you can’t balance your cash flow to retain the resources you need to operate, you’ll run aground, and all your clever ideas and practical methods will be stuck in the mud.

Core tips for managing your cash flow

Well, that sounds suitably terrifying, doesn’t it? You don’t want your hard work to go to waste, and you’re ready to do what it takes to keep your accounts moving in the right direction. So what does it take? Effort, and dedication, but thankfully not too much complexity. These basic tips should be enough to get things under control:

Choose the right software

There’s no shortage of useful accounting tools and payroll management suites out there, so you can do better than picking at random. Certain tools are better for small businesses, while others suit enterprise businesses — some are perfect low-budget investments, while others only make sense if you’re raking in the profits. If your software isn’t getting the job done, replace it with something better.

See the Highest-Rated Accounting Software →

Cut your everyday costs

Do you treat your entire team to artisanal pizza everyday, or stump up the cash for the aforementioned enterprise-level software despite having only four employees? If so, you’re shooting your company in the foot. Stop paying for things you don’t need to pay for, and your cash flow will swiftly improve.

The larger your business, the tougher this will be, because you’ll have more mystery payments stemming from delegated responsibilities, and you’ll get more pushback from employees who are used to having a certain degree of spending flexibility. You just need to accept that people will complain about “cutbacks” and resent your refusal to cover their noon calzones — they’ll get used to things, and ultimately understand the reasoning.

Master your invoicing

When you’re running a fresh business, it can be hard to get tough with clients. The power balance seems totally off: you rely on them, and feel like you need to bow to their whims or risk losing them altogether. This often results in weak invoicing — asking to be paid (instead of demanding), allowing indefinite delays, and even charging less than is truly warranted.

To avoid damaging late payments, you need a strong invoicing system, and this goes beyond the software you’re using. You need to be strict with your clients. Let them know in unambiguous terms that they have clear financial obligations to meet, and any failure to meet them will result in the dissolution of your business relationship. In short: pay on time, or get out.

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Build up emergency savings

Perhaps you’re convinced you have your payment schedule all lined up and sorted out. You can look ahead with absolute confidence, charting the course of payments coming in and going out at the perfect times — planned and regulated like clockwork.

Except the real business world doesn’t function that way. Things go wrong. Reliable clients hit financial difficulties that prevent them from paying even though they want to. Banks make administrative errors that cause payments to be wrongly frozen. These problems have knock-on effects that can lead to disaster.

Because of this, it’s never too early to start building up an emergency financial reserve. Set aside whatever you can whenever you achieve profitability. If the worst doesn’t happen, you can carefully siphon those funds as required — and if it does happen, you can survive long enough to resolve the fundamental issue and get back on track.

Strengthen your cash flow, and every part of your business will become easier. You’ll worry less, and even see greater profitability as a direct consequence. And the great part is that cash flow management isn’t even that difficult — it’s more about commitment and dedication than anything else.

Follow the above tips, and you’ll be on the road to securing the lifeblood of your business. To learn more, check out these accounting statistics you should know in 2019.

The Basics of Cash Flow and Managing it Effectively It's easy to go over-budget, but it's imperative that we don't. Use this article to familiarize yourself with cash flow basics.
Kayleigh Alexandra Kayleigh Alexandra is a writer for Micro Startups, your online destination for everything startup. She's passionate about hard-working solopreneurs and SMEs making waves in the business world.

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