The most important lesson in Cash Flow 101 is never run out of cash! Think about it – if you run out of cash you can’t continue your business – unless the business can be run by you and you have everything the business needs to be successful without cash.
Know you cash balance daily – don’t guess or think you know – understand how much cash you have and know what you will be using the cash for. Stay on top of your daily work, perform today’s financial transactions today and update your accounting system to reflect your cash balance. If you aren’t updating the cash flow balances delegate it to someone else.
Don’t use you bank balance as your cash balance. Your bank balance will not reflect your actual cash flow – use the bank balance to reconcile your accounting cash to determine the proper cash balance.
Have a cash flow statement for today and 6-12 months into the future. Having cash today isn’t going to make much difference if in 3 months you will have none. Knowing where and how you will continue operations into the future with the cash you have or expect to have will help keep you focused on what needs to be done daily.
Cash flow problems don’t just appear from nowhere, every dollar spent or invested today creates the cash flow for tomorrow. Purchasing inventory today and selling it tomorrow means a cash outflow to purchase the inventory and a cash inflow for the revenue realized on the sale. If the sale proceeds are realized immediately – cash inflow is immediate but if cash is delayed you could run short of cash. Understanding the consequences of slow collections can mean creating policies or finding other ways of funding for these short term cash flow shortages.
Be prepared for the future and know your cash situation daily so you can change processes or find alternate sources of funds should you find your business in a cash shortfall. A Cash Flow Statement can help you manage your cash so you are never left wondering why you didn’t see the lack of cash happening or why you have excess cash that could be invested and earning more for your business.