Maintaining a positive cash flow can be tricky, but it’s not out of reach. We are sharing this primer on cash flow: what it is and how you can help maintain a healthy one.
What is cash flow?
Basically, cash flow is the migration of money to and from a business. Tracked either weekly, monthly, or quarterly, there are two types of cash flow:
Positive cash flow
Positive cash flow occurs when the cash coming into your business is more than the amount leaving it. Essentially, your income from sales and other positive cash amounts outstrip your expenses such as accounts payable, etc.
Negative cash flow
Negative cash flow occurs when your expenses are greater than your income. Perhaps your accounts payable outstrip your sales or your payroll calculations are inaccurate. As you might well imagine, this can spell trouble for your business.
Identifying what type of cash flow you have is one of the best ways to keep your finger on the pulse of your business. Are you regularly making more than you’re spending on expenses? Your business is in good standing. Is your cash flow sinking into the negative? This can spell problems.
Maintain a positive cash flow
Maintaining a positive cash flow requires hard work and perseverance, but it’s not impossible. Here are a few tips and tricks for doing just that.
Automate where possible
Smart automation is the key to staying on top of your cash flow. You ought to take advantage of it where possible. You should be using accounting software to track your incoming and outgoing cash.
This will enable you to automate certain processes like tracking salaries and other regular expenses. It’ll also ensure you have a clear snapshot of your finances day to day.
Build a cash reserve
Keeping a cash reserve isn’t just a personal boon, it’s also essential for the health and well-being of your business. A cash reserve allows you to better weather financial storms. Perhaps a major invoice goes unpaid — your cash reserve can step in and help your cash flow remain healthy.
Having a cash reserve also lets your business take advantage of financial opportunities when they arise. Perhaps some stock goes on sale for a bulk discount? With a cash reserve, you’ll be able to take advantage of these savings without risking your business’s cash flow.
Keep your books up to date
Accurate, reliable bookkeeping is key when it comes to maintaining a positive cash flow. After all, if your data is off, any cash flow calculations you make are going to be wrong. This can quickly spell major trouble for your company. If in doubt, hire a professional bookkeeper. These people are trained and paid to maintain accurate numbers for your business.
Healthy cash flow relies on healthy invoicing. You should be invoicing regularly, either at the end of the month or, ideally, when goods or services are delivered. This will ensure any accounts receivable are kept at a healthy minimum and cash is in your accounts where it belongs.
Don’t get lazy about late payments. Ensure you have a process for chasing late payments and stick to it. Don’t be afraid to get legal when it comes to pursuing money owed.
Keep your personal and business finances separate
It can be all too easy to mix your personal and business finances, particularly when you’re first starting up. This is a mistake. One of the quickest ways to muddy your books and potentially affect your cash flow is to mix your personal and business affairs.
If in doubt, consider forming an LLC to make this step easier. The formation of an LLC forces you to keep your personal and business dealings entirely separate. As a bonus, it also protects your personal assets in the event your business runs into legal trouble. Here is a service that can help.
Positive cash flow is within reach
Positive cash flow is the backbone of any successful business. Now you have some tips and tricks up your sleeve for maintaining a positive cash flow for your business.