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Let’s get one thing straight – your business can’t survive without a consistent cash stream coming in. Even non-profits have to get funding from somewhere, but you have the extra burden of turning a profit. After all, how will you pay your employees? How will you keep your business afloat? How will you be able to put food on the table? How will you be able to build your business if you can’t reinvest earnings?

Don’t worry, though. Cash flow is something that with a little hard work, you can keep it coming in at a consistent rate. This involves marketing, strategy, discipline, and a great product and/or service, etc. – but you’ll also have to be able to manage your cash in a responsible way in order to keep track of your net profits and to keep it all rolling in. Great stewardship is an absolute must!

• Make frequent cash flow projections. Just like you manage other statistics, you have the opportunity to take charge and keep track of your financial data. When you analyze your fiscal data and make projections based on this information, it’s easier to make accurate predictions about the future of your business. This isn’t all about luck and guesswork, either. When you look at your financial analytics, you’ll know the likelihood of future failure – but also future success. Plan ahead. Put yourself up in a watchtower so you can see trouble coming way ahead of time.

• This hinges on tracking your money very closely. This involves more than just an Accounting 101 balance sheet or some computer software that does all of your math for you. You’ll likely need professional help and guidance to both handle your bookkeeping and advise you on future projections. Should you obsess over your cash flow and cash position? Yes, you should, especially as you are building your business. And, after your business is more “comfortable” with cash, you then need to stress about deploying that cash in profitable ways that allow your business to build value. Idle cash is also a common issue I see with more mature companies (remember opportunity cost!).

• Use this information to form meetings and forecasts. Once you’ve made predictions about your money based on the data compiled, it’s time to sit all relevant parties and employees down to talk turkey. Keeping employees informed about the cash flow situation is integral to keeping communication open. This also allows for input from those more directly involved with cash practices. If you don’t have employees that are mature enough to handle those discussions, you may need to rethink how you hire and/or lead.

• Make sure you monitor and name problems in their earliest stages. It’s not abnormal to see some little blips in your cash flow, but this is something you have to monitor. Whenever there’s any noticeable problem with your financial sector, it’s imperative you take note of the issue and watch it closely. If you don’t take note of these issues, you may pay for them later. There is a HUGE difference between fluctuations in cash and a “cash burn rate” that is, for all intents and purposes, financing the company’s losses until it becomes profitable. This can be a dangerous situation (especially if the business owner’s personal guarantee or assets are involved), and you will need to make sure your company is properly capitalized before you open up for business.

• Understand and focus on your net cash position. If you aren’t sure of what this is, the formula in laymen’s terms is “your cash on hand at the start of the period + estimated cash inflows – estimated cash outflows = net cash balance.” This should be included in your financial meetings, projections and forecasts as an important estimate number and guidepost. Understand EXACTLY how you (1) generate cash and how you (2) burn cash. Learn to understand what causes cash fluctuations. Put controls in place to ensure you don’t get in a bad spot. Avoid crisis.

• Focus on your cash output and input speeds. You can do this by quickly by getting invoices out, which gets cash coming in faster. Also, consider getting deposits before starting work or ordering any product (for delivery). Understand your cash receipt process and speed it up. Understand your cash disbursement process and slow it down.

• Watch how quickly you’re growing. There’s definitely a risk involved with getting too big, too fast. As you get more and more orders and invoices generating from your business, you have to be precautious and adjust as your business grows. Businesses incur more financial risks as they grow larger and larger – keep a hawk’s eye on your business’ growth and the financial risks involved with this process. As you grow, you must expect your cash fluctuations to get bigger and bigger in dollar amount. You will need to get better and better at managing cash and potentially creating a safety net of debt financing. A line of credit is good to have…establish one and review it often. Go back to your bank when you have growth spurts and make sure it gets increased to an amount that will withstand your $ fluctuations.

Managing your cash flow isn’t intellectually complex, but it’s something that takes intentional effort and discipline. With the right help, knowledge and resources, managing your cash flow can be handled in a simple, effective and valuable way. Cash is the “heart” of your business. If it stops, your business stops. Don’t underestimate its importance!

Dan Lucas
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