Balanced cash flow management is a basic and necessary condition for a stable, successful and long lived business. A business that loses its balance or slides into a negative balance can find itself in a dangerous spiral. It is therefore important to recognize the importance of keeping cash flow balanced, to take planned and effective steps, and to rely on professional business consulting.
What is cash flow?
Cash flow is the forecast of the expected balance in the business's or company's bank accounts. The cash in the business bank account is its reserve, a kind of financial oxygen the business needs in order to keep breathing and survive. A business whose cash flow is not balanced is likely to suffer "suffocation", difficulties and damage in the short and long term, such as lower credibility with suppliers, customers and banks, bounced checks and, in the longer term, business failure and bankruptcy. Every business owner should therefore aim to keep a positive balance, or slightly above the maximum overdraft the bank has set for the business. A negative balance can lead to a dangerous spiral and loss of control, and endangers the future of the business.
Cash flow management
In a small business, cash flow is usually managed by the owners using simple means, either in their heads or with records of fixed expenses and expected income. In a business of significant size with a large volume of activity, this is not enough, and it is recommended to move to professional support from business consultants and to use software that helps manage cash flow efficiently. Many owners of small and medium businesses manage cash flow with Excel spreadsheets, in which they enter expected expenses and income. This is a simple and free system to operate. However, it lacks several functions: fixed and recurring income and expenses (such as an electricity or phone bill) must be updated "manually" every month, information from the business bank account must be entered, and data must be transferred and copied by hand. Cash flow management software solves these problems and makes use, operation and tracking easier: fixed expenses and income can be entered, the software connects to bank websites and pulls data from the bank account, it can import data about expected and actual payments, and add information and estimates about how certain future transactions are.
Tips for managing balanced cash flow
1. Prepare a business plan Running a business day to day demands attention to a huge number of details and involves pressure, unexpected events and various problems. Business owners sometimes find it hard to "lift their heads" above the daily routine, to examine the overall state of the business, to identify trends in their field and to understand the state of the economy and the market as a whole. A well prepared strategic plan can serve as a compass for the business in the long term and give a planned answer to important questions that could cause difficulties in the future.
The strategic plan will set out courses of action, goals and guidelines for business development and future activity, and will let you act according to your objectives and in line with the financial needs and options available.
2. A separate bank account for the business When opening a business and trying to manage balanced cash flow, it is recommended to open a business bank account separate from your private account. A separate account helps you track the business's expenses and income on an ongoing basis, apart from private expenses. Defining the account as private (rather than as a "business account") may save fees, so check the terms the banks offer.
3. The business credit line Keeping to the bank credit line is essential in running a business. If you expect a significant overdraft soon, it is recommended to arrange it in advance with the bank officer who handles your affairs. It is also recommended to learn about the additional financing and loan options on the market today, including credit companies, leasing companies that help with buying vehicles and equipment, government funds and support funds that give business loans on reasonable terms, and more.
4. Know the tax authority regulations As for recognized expenses, the tax authorities have rules and definitions for them, and to limit "personal enjoyment" or "personal benefit" items the authorities usually recognize only expenses directly related to the business process. For example, a trip abroad will be recognized as an expense if you can prove that you visited a business exhibition or were invited to give a lecture on behalf of the business.
5. Financial review of your customers' condition For a business that depends on customers, it is recommended to run a professional check of financial strength, a check that determines whether the customers will be able to meet the payments they owe you.
If your experience or the financial strength check shows that a customer is expected to have difficulty meeting financial obligations, take precautionary steps such as avoiding extending credit and insuring the checks received from that customer.
If your experience or the financial strength check shows that a customer is expected to have difficulty meeting financial obligations, take precautionary steps such as avoiding extending credit and insuring the checks received from that customer.
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Cash flow in Excel
If you do not manage cash flow in your business at all, we recommend starting to manage it with a simple Excel file.
The next step is professional cash flow management software. But as a first step, managing cash flow in Excel can also be very effective.
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