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How to Manage Cash Flow in Tight Situations

by Sequel |


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June 10 , 2015

Cash is like the blood in your veins or the oil in your car. Without it, your business can’t survive.

Of course, every small and medium-sized business owner knows that at one point or another, cash will become tight. It’s an inevitable part of the business process. Startups need a lot of cash upfront, and they usually take a little while to become profitable. Older companies, while more stable, are not immune to a few bad months, especially if the economy is taking a hit.

Knowing that cash flow will more than likely become tight, business owners need to be ready to manage cash flow in these situations. Here’s how you can make every last dollar count and still keep your customers happy and satisfied.

Understand your business’ cash flow

Small and medium-sized businesses across industries manage their cash flows differently. In its simplest terms, cash flow is difference between cash coming into your business accounts and cash going back out. Most accountants define the classic cash-flow cycle as the time between:

  1. Buying raw materials
  2. Converting the materials to inventory
  3. Selling the inventory
  4. Collecting on the sales

Although this may seem pretty easy to manage, what most business owners struggle with is the time between each step. If you could do all four steps in a single day, then you’d never have to worry about your cash flow. This, however, is a lot easier said than done, and it’s not something you or anyone else can change.

When it takes more time to convert the cash out to the cash in, shortfalls happen. If shortfalls continually happen each month, your cash flow will dry up and you will have to close your business. We don’t want this to happen, so once you understand how your business’ cash flow works, you’ll be better prepared to manage it.



Understanding your business'  cash flow. Graph by Float Forecasting Tool. Understanding your business' cash flow. Graph by Float Forecasting Tool.


Monitor your bank account balance

When you send money, does it ever leave your bank account immediately? For most transactions, it takes a few days for the money to be taken from your account and transferred to another. Similarly, when you’re accepting payments from other banks or services like PayPal, the money isn’t immediately available in your account. Most require two to three business days to process the transaction.

This can cause you serious problems if your bills are due the day before money from other accounts comes into yours. To anticipate these types of problems, you need to be monitoring your bank account and checking it at least three times per day - morning, lunchtime and evening- so you can plan for any upcoming payments and make other monetary arrangements if you know a payment won’t enter your account in time to pay a bill.

With online banking and smartphone technology, it’s easy enough to keep track of your bank account’s balance all from your phone or mobile device.

Map your cash flow

To get ahold of your cash flow when in tight situations, you need to map out the timing of invoices and bills paid for eight weeks. This will allow you to see how your money flows in and out of your accounts in the near future, and it will help you anticipate what’s to come.

You’ll need to look to the past and forecast the future to do this as accurately as possible. More than likely, your accountant should be creating monthly forecasts for you, but when cash flow is tight, it’s important to create weekly forecasts.  If your accountant isn’t already doing this, insist that he or she does, and if reports start coming in late, consider an alternate option, such as a virtual CFO. Losing track of your finances could mean losing your business.

Don’t forget to include other expenses. If you have employees, then you will have to pay them wages, and you may also have to pay quarterly taxes. It is also safe to assume that you might have to pay for other random expenses, such as equipment maintenance, so be sure to budget for that too.

Now look to the future to see what types of projects and revenue that may be incoming. You might have outstanding invoices from the previous month or you might have a large account that will be handled in the upcoming month. Predict how much money you will have coming in and whether or not it will be coming in before or after bills are paid.

The overall goal is to make sure you always have enough in your accounts to pay your bills on time without incurring bank fees, overdraft charges or late fees. Though they may seem small, these fees can quickly pile up and end up costing you much more in fees you never budgeted for. When cash flow is tight, every dollar counts.


budgeting Keep track of your budget. Graph by Float Forecasting Tool.


Look for new opportunities

When you finish mapping your accounts and creating weekly forecasts, you should see an accurate representation of how your business will perform over the next eight weeks. You will see where every bill is paid and when you expect invoices to come in.

Analyse your projections and look for places where you know money could be especially tight. Plan for these periods and mark them in red. If you have costs that could be cut without damaging the company too much, consider cutting them for the time being. If you need to purchase new equipment, consider trying to get an older, simpler or even used model.

Look for new opportunities within your industry and community. What could you do to get your name out there and attract new interest in your business? What new services could you offer your customers. Brainstorm with your team or teams and think outside the box.

After you’ve gone through the first month, look back at your projections and see how you did. Did you over or underestimate some weeks? Using what new information you have, have another look at your second month’s predictions and make adjustments where necessary. If you think you’ll still have a weak cash flow by the end of the second month, project for the next month.

Your cash flow is vital to your business, and when the money starts to get tight, you must know how to readjust your finances until business gets going again. Once you learn to manage cash flow, you’ll be prepared for any business climate.

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