When you’re an entrepreneur, it’s easy to get caught up in the passion of your business and lose sight of the importance of managing your cash flow effectively. But when you don’t take care of your financial situation, it can cause more problems than just a lack of funds—it can also stress out employees, hurt relationships with suppliers and vendors, and eventually lead an entrepreneur down a path toward failure. That’s why every successful business owner should understand how to keep their money flowing smoothly through their operations.
1. Know your cash flow needs and habits
Before you can start managing your cash flow, you need to know how much money you have coming in and going out.
- The first step is to figure out what kind of cash flow needs you have. How much do you need each month? Do you have a mortgage or rent payments? What about student loans and car payments? Where will your family vacation this summer? Are there other large expenses that are not covered by insurance or a budget plan for smaller items such as food and gas?
These questions are all important because they’ll help determine how much money comes into your household each month (known as income) and what goes out (expenses). By knowing the answers to these questions, it’s easier to decide which bills get paid first so that the ones with higher interest rates don’t take over the rest of your finances.
2. Pay your bills on time, not early
In order to ensure that your cash flow is strong, it’s important to pay your bills on time. However, there are many people who pay their bills early in order to avoid paying interest. While this strategy may seem like a good one at first glance, it actually has some drawbacks. If you can’t afford something and don’t want to be in debt for it, then there’s no need to spend money on that item right now or ever.
If you do decide that an item is worth purchasing before its due date, try asking yourself some questions first:
- How much interest will I save by paying early?
- Is this purchase absolutely necessary? If so, why? Are there any alternatives available that would save me money in the long run without depriving me of what I truly need today (like paying off credit card debt instead of buying new clothes)?
3. Keep receivables in line with payables
The third step to managing your cash flow is to keep receivables in line with payables.
Receivables are the money you are owed by your customers, while payables are the money you owe to your suppliers. When receivables exceed payables, you have positive cash flow because there’s more money coming in than going out. Conversely, when payables exceed receivables, it means that there’s more cash going out than coming in—and this will cause a negative cash flow situation.
4. Explore financing options
- Explore financing options
Depending on the size of your business and its needs, you may want to consider four different types of financing: bank loans, trade credit, factoring and debt financing. If you’re interested in leasing equipment for your business instead of purchasing it outright with cash, there are also several types of equipment lease options available. Each option has its own pros and cons which we’ll explore below.
5. Keep business expenses separate from personal expenses
- Keep business expenses separate from personal expenses.
- Keep good records, including receipts for all business-related purchases and trackable mileage information.
- Make sure you’re deducting the right amounts on your taxes, keeping track of any tax deductions you can take advantage of as a small business owner.
- Set up a separate bank account for your business’s cash flow needs (a checking or savings account) so that you can keep an eye on what’s coming in and going out, plus it will help you monitor your financial health much more easily.
Increase the chances that you’ll be a successful entrepreneur by understanding how to effectively manage your cash flow.
Cash flow is the lifeblood of any business. If you don’t have enough cash coming in, you won’t be able to pay your bills, keep your employees on board, and stay competitive in the marketplace.
Cash flow isn’t just important because it provides liquidity for a company; it’s also critical to understanding how well a business is doing financially—and that’s as true for small businesses as it is for large corporations. Cash flow analysis helps owners identify problems before they become big issues that can eventually lead to bankruptcy proceedings or liquidation of assets (which isn’t always bad news).
To understand how cash flows through your organization, take a look at these two important metrics: income statement and balance sheet. The income statement shows all incoming funds over a period of time (monthly or annually), while the balance sheet lists all assets plus liabilities as they relate today compared with yesterday—or even one week ago depending on how often you run reports on them both together as part of an ongoing monitoring process throughout each year so that nothing slips through cracks unnoticed until too late!
As a business owner, it’s important that you understand how to manage your cash flow. This article has given you some tips on how to do so effectively, but there are many other resources out there that can help as well.