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How to Better Manage Your Cash Flow and Plan for the Future A key indicator of the financial health of your company, cash flow is a metric you can't afford to ignore.
One of the most important measures of the health of any business? Cash flow, which measures how much money comes in and out of your business. A robust cash flow is a good sign for the future. But even when money is flowing in, poor cash flow management can prevent an otherwise promising business from truly thriving.
With that in mind, the following strategies can help business owners better manage their cash flow, in turn laying the foundation for a solid, successful future. After all, it requires more than simply trimming expenses and trying to make more sales.
Track your invoices.
Payment for many products or services is rarely instantaneous. That means it's on you, the business owner, to keep track of every outstanding balance.
Develop a system to generate, send, and track all invoices to ensure that you don't miss a check, and are able to follow up on late payments. Although chasing invoices isn't fun, part of running a business is making sure that you actually receive payments for all goods and services sold.
Plan for the best but prepare for the worst.
As a business owner, growth is exciting. When things are going well, it's tempting to keep the momentum going through continuous spending. However, long-term survival often depends on a more conservative approach.
Because cash flow can be unpredictable, particularly for new and seasonal businesses, it's always a good idea to have enough savings to cover lulls in demand or unexpected expenses such as broken equipment. The exact amount will vary based on the specifics of your business, but as a general rule of thumb, aim to have enough cash on hand to cover three to six months of expenses, including payroll and inventory.
Along the same lines, it can be tempting to splurge on a large batch of inventory early on in order to seamlessly meet growing demand. Unfortunately, surplus inventory is expensive—it can lose value over time or even expire, saddling your business with extra costs. As a result, it's generally better to take a more gradual approach to stockpiling inventory, growing your supply with, instead of in advance of, customer demand.
Keep an eye on your credit.
Starting, growing, and maintaining a business frequently involves taking out a loan so you can invest in equipment, inventory, and payroll. That's a calculated—and necessary—risk. But not all lines of credit are equal. When borrowing, pay careful attention to a loan's payments, interest, and terms, all factors that will impact cash flow.
Similarly, when your business is turning a profit, it can be easy to find something to spend the money on. Flashy new office tech is fun, but it's prudent to consider whether each purchase improves the core health of your business. (Unnecessarily fancy offices? Probably not. Investing in new, more reliable systems? Very likely worth the expense.)
Try to avoid a situation where, because of unnecessary purchases, you are in a place where you have to take out additional loans with less-than-favorable terms. Your future success depends on the smart strategies you put in place today.
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U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.