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Entrepreneurs that don't successfully manage their cash flow may not be able to make the investments needed to compete or may have to pay more to borrow money to function.
Cash flow is the movement of funds in and out of your business. As an entrepreneur, you should be monitoring this regularly, and aiming for a positive cash flow: when the money flowing into your business is more than that leaving your business. While years ago we monitored business through profit and loss, or the balance sheet – now, more than ever, cash in the bank account is best.
Many entrepreneurs see growth as the solution to a cash-flow problem. But you may achieve your goal of growing the business, only to find you have increased your cash-flow problems in the process. To grow you need to plan for the related cash outlays, so they do not come as a surprise.
So how can you improve your cash flow?
Manage debtors more effectively
Businesses often have to extend credit to customers, particularly when starting out or growing. But, you have to do your research beforehand to determine the risk. Can they meet your payment terms? Is their business growing or faltering? Are they having cash-flow problems? Run a credit check on potential customers and ask them to fill out a credit application, and check references they've provided.
A great sales win without payment could sink a business. The key is to manage internal efficiencies and increase sales.
Related: How to manage your cash flow when your company is growing
Increase your sales
Customer acquisition is essential for a growing business, but it can take time and money to convert prospects into sales.
Selling more to existing customers not only builds loyalty, but is an easier sell, and you may be able to do this by analysing what they're buying and why. Information may even lead you to increase your profit margin and, hopefully, generate more cash. But, be careful when increasing sales because you may just increase accounts receivables, not actual cash if sales are on credit.
Early payment discounts for early payments
One option to increase cash flow is to offer your customers discounts. While this practice may not impact your profit margin, it may help your cash flow management by incentivising customers to make payments earlier than billing cycles typically require. Your company may also take advantage of this with suppliers and others that you owe, but be careful that your early payments don't leave you with a cash flow shortfall.
Related: Lead your business to high-impact, high-growth returns
Getting control of your cash flow
I always ask two questions to get a sense of whether you have your business' cash flow situation under control:
- What is my cash balance right now?
- What do I expect my cash balance to be six months from now?
If you can't answer these two questions, you’re in trouble.
To keep your business on track, understand your cash flow and understand and project your income and expenditures to plan well for capex.