Stop Fearing the Cash Flow Roller Coaster

As you know, starting your own business isn’t for the faint of heart, and you didn’t take the plunge because you enjoy leisurely amusement park rides. So stop fearing the roller coaster ups and downs of cash flow.

Understanding your business cash flow allows you to plan ahead and gives you a high comfort level that you will be able to meet your goals. To achieve business success you must capture new opportunities, whatever the risks. This is evident when using cash for expansion or upgrades. Having cash on hand gives you a feeling of security, but your business will stagnate if you fail to deploy cash to grow. The only obstacle is making sure you have sufficient funds.

Determining Cash Flow

Start by assessing your company’s cash flow. Many enterprises have “cash basis” bookkeeping – income is recorded only when collected. Counting income when you send an invoice is “accrual basis.” When using cash basis, expenses are those already paid; accrual basis records expenses when you’re billed.Your cash basis profit and loss statement (P&L) mainly reflects actual cash flow for both income and expenses. Some adjustment is required for cash outlays not on the P&L, such as principal paid on loans or purchases of furniture and equipment. Also, non-cash accounting expenses such as depreciation are added to profit when determining cash flow. Your accountant can create a cash flow statement as part of your monthly financial reports. This is particularly important if you have an accrual basis P&L. Accounting software such as QuickBooks allows printing of cash flow statements.

Evaluating Cash Flow

Improve cash flow by finding ways of reducing expenses without draining productivity. Sometimes cutting your own salary is the best option; a wise entrepreneur is willing to reduce his pay in the short term for a long-term gain. A reasonable calculation of monthly cash flow is the average over several months. This is the amount of money your business generates to solve special problems such as equipment breakdowns as well as to tackle unforeseen events such as shipping problems or a late-paying customer. Calculate the cash you’ll need each month for these contingencies. Cash flow is also required to reduce debt. You must keep your borrowing power intact for those times when you need an immediate loan. After accounting for emergencies and loan repayments, the remaining cash flow is available for new goals.

Funding Goals

Next, prioritize objectives for improving or expanding your business. Outline costs and benefits for each goal and identify best choices. Armed with the cash flow figures, you now can determine how many months of operation are required to safely build the funds needed for a particular task. Goals such as upgrading equipment or adding an employee are easy to implement if you plan using cash flow management. Or you can use the excess cash flow to service additional debt. That analytical approach is what bankers need in order to loan you money to modernize and grow.

How a Working Budget Benefits Your Business

Many microenterprises and solopreneurs believe they are too small to need a working budget. Some start-up owners who are busy launching their operations think it’s a waste to spend time developing one. And some small and medium-sized enterprise owners reason: “It’s just a shot in the dark, anyway.”But no matter how small or entrepreneurial your business, you need to have a working budget. A budget is a critical part of the initial planning stage, a crucial component of your business model and a vital tool for ongoing strategic planning. A working budget can help an entrepreneur determine whether a new product or idea is financially viable. It serves as a game plan for planning and timing the growth of a young business.

For an established business, a working budget is a way to monitor the firm’s financial condition and a key part of sound fiscal management. The term “working budget” refers to the fact that the budget is a work in progress and that it will undergo modification and adjustment as time goes on. You may need an accountant or financial professional to help you set up your budget initially, but it’s important that you be familiar with the numbers and thoroughly understand all the components of your budget. If you are a new business owner or an entrepreneur with just an idea, you will need to do some research to come up with realistic budget numbers. Look at similar businesses in your industry or sector and in your area. This research will enable you to understand the market potential of your business and will help you in many other ways as you develop products, pricing, promotions and market presence.

Of course, if you are an established business owner, you can use your historical data to estimate future revenues and expenses. Make sure that your numbers are reasonable or, better yet, on the conservative side.And be sure that you add plenty of detail about items in your budget, including specific data relevant to your particular business.The more detailed and thorough your budget is, the easier it will be to use it to secure funding from banks and lending institutions and support from investors. From time to time, you will need to adjust your budget based on variances between the budgeted figures and your actual figures.This is a good opportunity to evaluate your financial situation and tailor your business plan to help you reach your business and financial goals.

Maintaining a budget for your business on a regular basis will also help you track expenses, analyze your income and anticipate future financial needs. Use your budget as a tool to improve and fine-tune your business – and to keep expenses in line. By having and using a working budget you will be better able to make good decisions about your business and any new ventures you’re considering.