At the recent Entrepreneurs Exchange one of the founders of Green and Black’s chocolate company Craig Sams said that the one thing that he wished someone had told him about business was the importance of cash flow. If a business runs out of cash then everything stops however profitable, however hard everyone has worked. That is why it is so important.
Many businesses record what comes in and what goes out. At the end of the year they give it all to their accountant.
If you make it to the end of the year that may be OK. However that is like crossing a road without checking for traffic. You may get safely to the other side and say that was not a problem. On the other hand you may be hit by a truck.
Do not leave these matters to chance.
Every business needs to monitor its finances throughout the year so that the ship can be steered straight and adjustments made from week to week to ensure that it does not veer off course.
It is not rocket science. You project exactly when you will be paid for your sales and when you will have to pay for your purchases. Tie those up with how much cash you have in the bank at the start and make sure you will always have money in the bank account to pay the bills as they fall due. The easiest way to do all this is to set it all out on a diagram. Figures can make the eyes glaze over. A diagram is much easier to relate to.
If you can see there is a point when you will not have the cash you need you can then make adjustments to stop it happening. Do not buy something or get longer payment terms. Make sure that the payment terms for your invoices are no worse than those on your bills unless you have the means to finance the time in between. Get prepared.