Preparing for the future is vital for every business, and Q1 is a great time to take a realistic look at where you are and what steps will be needed to make improvements from the prior year.
One area that is absolutely necessary to plan for is managing cash flow. In this article, we will look at some of the best ways to ensure that your business has a healthy and consistent cash flow, as well as some common pitfalls to help you avoid common cash flow problems.
Know Your Numbers
Part of preventing cash flow problems is looking at your numbers to get an accurate appraisal of what your company is doing well, and pinpointing areas that could use improvement. Knowing your numbers allows you to evaluate where you can make adjustments.
If your small business doesn’t have an accounting team or a dedicated accounting department, it is likely that certain financial issues will slip through the cracks. For instance, forgetting about annual payments that come due at a certain time of the year, is something that is easy to overlook as a CEO. However, a team member with a dedicated accounting role is unlikely to make such a glaring oversight. Having team members who can help plan for large expenses and manage cash flow can be an invaluable asset to your company.
Having an accurate historical financial overview is key to identifying potential cash flow problems and adjusting for the future. Frequently, cash flow problems present themselves as historical trends for companies. For instance, if business slows down during Q4 year after year, knowing this through careful analysis of your financial data will allow you to plan a different approach for this year.
Letting the numbers speak for themselves is key. Don’t read too much into them or use them to justify costly expenses you know your company can’t afford. Part of good financial stewardship is maintaining the balance between being financially optimistic and remaining pragmatic about creating a realistic business budget that grows with your company.
Review Your Business Budget
Feeling stretched for cash? Try adjusting (and adhering to) your business budget. Chances are, during periods of growth, your budget is one of the first things that gets overlooked because the cash is flowing. Keeping your expenditures in line with the budget will avoid excess and unnecessary spending in times of growth and reserving that cash flow for the leaner months. Reviewing your budget on a quarterly basis is essential to make sure that you are sticking to the plan. Note: Make sure that your budget has allowed for important expenses such as making strategic hires or outsourcing less profitable tasks during growth periods.
Keep a Safety Net
Many businesses run into trouble because they don’t keep enough cash on hand to manage cash flow emergencies. Unexpected expenses such as repairs, and new equipment or software needs can add up quickly. Sometimes even the best planning can leave you with expenses you weren’t anticipating, which is why it is always a prudent move to keep extra cash on hand–more for cash flow emergencies.
While it is great to set big goals and build motivation for the team, overestimating revenue can be a dangerous accounting strategy. When companies overestimate their revenue, they usually also plan for additional expenses to meet that growth. If the spending is not in line with the actual revenue, companies can quickly get into financial problems. You can avoid these headaches by erring on the side of caution with future projections, and regularly analyzing the financials as compared to the budget.
Tentho Can Help You Prevent Cash Flow Problems
Tentho offers accounting specialists who excel at helping clients maximize their business budgets. Growing a company is hard work, and Tentho has trained experts who can help with your accounting at every stage of your business’s growth. Tentho works with you to create a custom financial solution that fits your unique business needs.