This is a guest blog from Anna Eschenburg of Fundbox.
Struggling to pay your bills? Worried that you have a cash flow problem? Or just not making enough money in the first place?
It may seem odd, but profitable businesses are more likely to suffer from cash flow problems than any other. Surely that’s a contradiction? Not really, if you’re profitable, you still have bills to pay, late-paying clients to deal with, new inventory to buy, and unexpected outgoings to account for.
So although on paper your business is profitable and making money, if it isn’t managed correctly that cash can quickly exit your business as quick as it came in.
So what can you do about it? Assuming your business is profitable, here are some tips for dealing with a cash flow problem, before it gets too late:
Forecast Your Cash Flow
Just as your business plan guides your strategy for the year, your cash flow forecast should guide and inform your financial decisions. You need to know when money is coming in, when it goes out, and what you are left with at the end of each month so that you can predict patterns and plan for any bumps in the road.
Keep an Eye on your Current Cash Situation
Now that you have a forecast in place, it’s time to step back and look at the now – what cash came in this month and what went out? This is where you cash flow statement comes into play.
Whereas your profit and loss statement can help you gauge profitability, your cash flow statement can help you see what cash you have on hand and whether you’re generating more cash than you are spending.
Control and Manage the Timing of Cash Flow
A fundamental part of ensuring a cash flow positive situation is knowing when cash enters and exits your business and doing everything possible to control that flow. The best place to start is to closely manage your accounts receivable and payable. Invoice early (don’t wait till the end of the month) and collect often (if you are constantly waiting to get paid, check out services like those offered by Fundbox). Inventory is another cash drain (reduce and shift it where possible). Finally, look for ways to improve your cash conversion cycle.
Have a Cash Cushion
It’s basic financial advice but often ignored until it’s too late – try to accrue cash in reserve. It depends on your business and it’s needs. Freelancers may only need 2-4 months in reserve while employee-based businesses and those with supply-chains may need help from a business credit card or line of credit help them maintain business continuity.
The Bottom Line
Don’t assume profitability equals cash. The above steps can help you monitor and take steps to ensure that you have as much cash on hand as possible, to manage the highs and lows of the business year.
Anna Eschenburg is the senior marketing manager at Fundbox. Fundbox offers business owners a simple way to fix their cash flow by advancing payments for their outstanding invoices, giving small businesses back the power to control their cash flow.