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Why Every Entrepreneur Needs to Monitor Cash Flow
Small business owners have a variety of goals but making a profit feature as a key objective for most of them. While generating profit is a legitimate end, businesses have to stay afloat through various cycles, including rough times before they can enjoy the rewards of success.
Keeping a close eye on cash flow is an important aspect of the financial structure of start-up firms. It generally helps businesses stay out of financial troubles. This involves more than just looking at the business’s bank account and the profit and loss statement. As the business owner, there are a number of important items that need regular monitoring in order to gauge the health of your company’s cash flow. Ideally, a close monthly review is suggested. If the business transactions are significant, you could consider a weekly review. This way, a problem can be spotted early on with plenty of time to resolve it and issues are addressed before they turn into a crisis.
Some key metrics you should regularly monitor include:
Bank Balances
‘Cash is king’ and cash in the bank is important. However, it is just one of the numerous components to consider when looking at the full flow of cash. Consider monitoring and understanding all transactions that comprise your bank balance, like payments for raw items, costs of production, hiring staff, selling products, invoicing, collecting on those invoices, and so on.
Sales
Sales are only the beginning of the process of generating cash flow, but obviously, without it, you won’t have any cash to receive. If your cash flow is in good shape, you won’t need to focus on it as much, and you’ll be able to spend more time generating sales income.
Receivables
Ideally, you should keep your accounts receivable down to the lowest level possible. One goal is to have next to no receivables beyond 30 days of billing. Encourage clients to pay quickly. Almost as important is to know with relative certainty or reliability when you can expect to be paid by each client.
Inventories
Keep only that which is enough and limit excess inventory on hand. This could require very close monitoring to establish reliable or repeatable and somewhat predictable sales patterns to help you keep inventory at a realistic level.
Payables
Pay close attention to what you owe. If you pay your bills sooner than you need to, you might risk leaving your business short of cash. However, paying too late could result in penalties and possibly hurt your relationship with vendors.
Credit terms
Limit the amount of time you allow your customers before they pay for the goods and services that you sell to them. Be cautious about extending credit without thoroughly checking a new customer’s credit history.
