Michael Burdette, business analyst and author, explains how to improve your cashflow management.
The first step to improving cash flow management is to know your business’s balance sheet back to front. This may sound obvious but many people don’t know what they need to know when it comes to cashflow.
Often small business owners have a passion for providing a service or a product rather than a financial background and it can glaze their eyes over – until they get into trouble.
The error many people make is to focus on their businesses profit and loss statement to the exclusion of all else. It’s a potentially fatal mistake because healthy profits can mask an incipient cashflow crisis.
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Profit and loss statements do not usually contain the information required to make an adequate cashflow projection.
To get across cashflow, you must start with a properly structured balance sheet that has all the detail, from inventory and debts to interest costs. You must know and understand the numbers. Business owners often think that’s what their accountant is for, but they couldn’t be more wrong.
Only with a comprehensive balance sheet in hand is it possible to construct a useful cashflow budget. Sometimes called a cash flow projection, this vital document is a “best guess” at a business’s cash inflows and outflows over a period of time.
Business owners should update and review their business’s cash flow budget on a regular basis using conservative revenue and expense estimates. This will not only provide an early warning system for potential cash shortages, it will also help build your business’s credit track record, useful information when asking banks for credit.
Read more on managing your cashflow here.