Cash Flow: It's not a problem until it is gone!

Cash Flow: It's not a problem

Several years ago, I met a young man who had just received a sizeable family inheritance. Wanting to use his new wealth wisely, he decided to start his own business and use the money for his startup costs.

With his expertise in computer programming, his business was focused around developing a new software application. Knowing this would be a large task that he could not do on his own, he proceeded to hire a team of highly skilled computer programmers, leased expensive office space, and hired office staff to support the programming team.

He had done it. He was well on his way to accomplishing his goal when, six months into the business disaster struck. He was out of money.

The business owner had decided not to use Fulling Management & Accounting, Inc. or any other accounting firm to help him in planning ahead for cost of production, overhead, slow sales at startup and delays in accounts receivable. He just assumed the large inheritance would never run out.

Unfortunately, this business owner is not alone in his assumptions for business decisions rather than using data from solid cash flow management.

4 steps towards better cash flow

1.

Plan ahead

Create and write down a business plan. Identify your strengths and weaknesses within your business and identify opportunities as well as threats to accomplishing your business goals.

2.

Develop a spending plan (budget)

 List out your sales revenues and the expenses that it will take to run your business. You may want to break this down for each month, identifying months in which there may be fluctuations.

3.

Compare to industry standards

You are not alone. For most companies there is financial information available that allows you to compare your company to others within your same industry classification.

4.

Compare your actual Cash Flow to your Budget

Once you have your budget in place, use it! It does not have to be a rigid, no flexibility box, but it should be used as a guideline in comparing your actual sales and expenses. There may be times you need to adjust your budget as you foresee fluctuations.

Remember properly managing your cash flow can have a tremendous impact towards the success or failure of your company. Make sure you have the right management tools and expertise in place.