What is cash flow and why is it important?

Cash flow is the total amount of money that you have coming in to your business from revenue and going out for expenses. Managing cash flow is an essential part of running a business. It is particularly important for new businesses because if you can’t manage your cash flow in the first year, it is unlikely that your business will survive the next year.

How to manage your cash flow

There are different methods and tips you can implement to manage your cash flow effectively. These include;

Cash flow statement

A cash flow statement shows how much cash is generated by your business within a period of time. A cash flow statement will help you manage your finances. It will track all the money that is flowing in and out of your business and can help you plan ahead. A cash flow statement will list your opening balance, the cash incoming from things such as sales and other income, the outgoing cash, the monthly cash balance (total incoming minus total outgoing) and a closing balance.

Encourage your clients to pay

One option to help your cash flow is to offer your clients early payment discounts. You also need to be firm with your clients and use an adequate invoicing strategy to ensure that bills are paid on time. If payments have not been paid, you need to chase them up and if need be, take formal action to ensure payment. Your customers should be able to pay you with ease, your invoices should state payment details.

Monitoring your cash flow regularly

Cash flow can fluctuate and therefore you should consistently review your cash flow to determine whether your business has any shortfalls, or predict what will happen in the future.

Maintaining your accounts

Your accounts and books should be kept up to date to ensure you can monitor the financial state of your business easily. If you do not have accounting skills, you should consider hiring a professional accountant to assist your business.

Keeping your business and personal finances separate

It is important to keep your business and personal finances separate, if they get mixed up it can be hard to analyse your business performance.

Cutting costs and improving revenue

You should frequently review your pricing to ensure you are improving your income. Strategies such as offering creative incentives can help boost your sales to improve your revenue.

Get advice

Improving your financial management can help your cash flow, a professional can assess your individual situation and provide you with advice on how to grow and manage your business effectively.