Managing Cash Flow
Good cash flow management means understanding every inflow and outflow of cash. In principle, you must delay every outlay of cash as long as possible, while incentivizing everyone who owes you money to pay it as rapidly as possible. Also, it’s about being vigilant about limiting any surprises such as unanticipated payment lags and unplanned-cash outlays. So how do you be proactive in managing cash? Here are some basic disciplines that every entrepreneur must understand and practice to optimize their cash:
- Analyze Cash Every Week: Each week, check your cash balances and how your expected inflows and outflows of cash compare to your projection in your cash flow projection.
- Check Accounts Receivable versus Accounts Payable: Your main inflow of cash is from customers for payments, called Accounts Receivable. Your main outflow is payments for services and vendors, called Accounts Payable. Your goal is to decrease the days it takes to collection your Accounts Receivable and to increase the days it takes to pay your Accounts Payable. Your accounting system should allow you to easily run these reports.
- Monitor your Customer Balances: It is easy to fall short in the management of your Accounts Receivable (money owed to you from customers). Always use a software system to track who owes you money so that you can follow up with customers and send invoices and statements.
Managing cash can feel like a full time job – but one well worth the effort.