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Managing Cash Flow

Adequately managing cash flow is something any business must do to be successful, no matter how big or small your business is. Knowing exactly where money is coming in and going out is essential. Without a clear understanding, you will not be able to pay those who keep your business afloat - namely, your creditors, employees, and suppliers. And that will sink your business in no time, not to mention your credibility.

Below are some ways to effectively manage cash flow:

Perform a cash flow analysis.
Analyze each area of your business that affects cash flow (i.e. inventory, bills due to creditors, bills due to your business, etc,). By analyzing each area separately, you can more easily identify and manage the shortages and surpluses. Understanding your cash flow is a necessary starting point.

Make a cash flow statement.
A cash flow statement is a list of where your money has come in and where it has gone during your current pay/accounting period. Cash flow statements are usually divided into three sections: cash flows from operating (like rent, payroll), investing (like purchases of equipment or property), and financing (like borrowing, debts, or paid dividends). Once these sections are laid out, the next step is to calculate the net cash flow by either using the indirect (most common) or direct method. Both methods come out with the same result; the indirect is more common because it is a little simpler. Formulas for either method can be found on various websites or through an accountant.

Create a cash flow budget
Once you understand your business' problems and strengths regarding cash flow, create a cash flow budget to predict the next few months, or even years, to avoid any future surprises. By making a cash flow budget, you can better anticipate times in the future where there may be less - by knowing in advance what months may pose a problem in your cash flow, you can take certain precautions or make arrangements to deal with that particular period.

On the other hand, by doing a budget, you may realize that you may have an excess another month. When you know about a surplus, you can apply it to improving an area in your cash flow that hasn't been as productive. This will help you avoid a cash flow gap that would require you to borrow more.

The first step in creating a cash flow budget is to make a sales forecast. One way to get this forecast is to use the previous year's sales. While it may not be exact, it is a starting point.

Next, figure out your cash inflow. As with the sales forecast, a way to figure out the cash you'll be receiving is by using the previous year's receipts.

Third, figure out where you will be spending your cash in the months to come. These expenses may include payroll, operating expenses, inventory, etc. As with the other parts of the budget, you may not come up with an exact amount, but the estimate will serve its purpose.

Finally, put the numbers together by subtracting the cash outflow from the inflow. If the number is positive, you have a cash surplus for the projected period. However, if the number is negative, you will need to figure out a way to narrow the cash flow gap. This can be done by cutting costs or by getting a loan. While finding a cash flow gap is not a desired result, keep in mind that it is better to know in advance than to be caught unaware and unprepared.

Through regular management and planning, you will be in more control of your business' cash flow. By doing so, you increase your business' security, narrow cash flow gaps, and open yourself for more success and higher profits.

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