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Effectively managing the cash flow of your business is really about protecting your bottom line. Turning a profit is great but only if you see the cold hard cash that those paper profits are supposed to be bringing in. If to many customers fail to pay you or pay you late on a consistent basis then your business could land itself in serious trouble without you being aware of how bad the downward spiral really was.
Forward thinking entrepreneurs are acting to protect and even grow their businesses. But this means they are protecting their greatest asset. Cash in the bank. Successful entrepreneurs and growth businesses understand that there is a need especially in rough economic times to protect what they have. Otherwise they may find themselves turning a good profit on their goods or services, but they simply don't get enough money in quickly enough to cover all the money going out of the business to pay for materials, stock, staff and all the other costs of running the business.
The flow of cash into and out of your business is of even greater concern to start up businesses as they are in the position of having to also grow a customer base. This means that a great deal more money will be going out the door than is coming in. With the economy being the way it is, managing and monitoring cash flow is definitely a priority for any business because you don't know what's coming in the door at any given time. You can find your cash levels fluctuating wildly.
The key to managing your cash levels is not to let your debtors get out of hand. Understand your monthly income and expenses. Learn to anticipate and avoid cash problems. Discuss with your banker our accountant how to build working capital reserves. A company may have excess cash but be unprofitable. A company may be profitable but lack cash. You want to be profitable and have that cash as well.
The Solution is to keep cash flow plans up to date. Make sure cash flow plans are realistic. Allow headroom in your cash requirements to counter unexpected variances. Be aware of your current cash position, forecasts and bear in mind potential fluctuations. Closely manage your stock and debtors to minimize needs for working capital. And manage your supply chain to gain maximum credit. Talk to creditors early if you need to extend. The bottom line is that you need to control your cash flow and not be at its mercy.
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