Understanding Cash Flow
Inside your Business and Out – Part 1: Your Business
Every business needs to be effective in managing the money coming in and going out.
Effectively managing cash flow forms the life blood of any business and needs to be one of the key priority areas for anybody running one. Awareness of the value of your debtors against the liabilities owed to your creditors and the cash reserves you have in hand are vital if your business is to run successfully. You often see established businesses blame cash flow for their demise and setting this discipline as a priority is a good habit for a new business to adopt.
There are a number of good business practices you can utilise that will keep your business cash flow healthy:
- Sales forecasting – use your knowledge of the market trends and demands to make sound assumptions about where and how much you will sell. Having an accurate estimation of what income you will generate will be extremely beneficial in assessing the financial needs of the business.
- Credit control – dealing with customers is not just about marketing and selling to them. You need to ensure you get paid for what you have supplied! Providing credit is how most B2B businesses run, but agree your terms with your customers at the outset and stick to them. Make sure customers are checked for creditworthiness and ensure your payment terms and conditions are clearly understood. Making sure you are diligent about late payments is also important.
- Controlling costs – removing costs or saving on the cost of running the business is something that is worth reviewing on a continual basis. The savings you achieve go straight to the bottom line as profit! Things like savings on utilities or monitoring suppliers for the best value are good examples of areas to review.
Being diligent about the health of your business requires a clear understanding of cash flow and you need to be aware of any issues well before they are significant enough to be fatal to your business.
Understanding cash flow and implementing an effective plan to ensure you have a positive cash flow from the start is important.
Understanding Cash Flow
Inside your Business and Out – Part 2: You!
Now that the cash flow of your business has been addressed, perhaps you should consider how your personal balance sheet looks.
Looking at your own circumstances isn’t just about ‘what’s coming in versus what’s going out’. It should involve challenging yourself to think about what you really want out of your life. Some questions you could ask yourself are:
- What do I want to achieve over the course of my lifetime?
- What type of lifestyle do I want to have for my family? Both now and in the future.
- Where do I want to take my business?
- What is my relationship like with money?
The aim of this process is to help establish your own personal goals and how you want to live the rest of your life.
You have probably already explored this type of deep-thinking when putting together plans for your business. So why not take the time to explore this when it comes to your own life? Much like your business plans, which contain ideas of how the business can achieve its’ goals. Lifetime plans can be constructed to help you to achieve your own aspirations.
Establishing a lifetime plan takes three simple steps:
- Decide what you want to achieve from your life and ‘dial in’ those personal goals and aspirations.
- Look at your ‘numbers’ – establish what you already have in place (your savings, your investments, your pensions) and how your expenditure looks both now and in the future.
- Implement change – this is where you begin to make the necessary changes to help you achieve your goals. This could include saving more, reviewing your existing investments or pensions, taking out additional insurance to protect your family against the unexpected. It may become apparent that you need to modify some of your financial habits, such as cutting back on entertainment or visits to the coffee shop!
As with even the best laid out plans, inevitably things will happen and circumstances will change, meaning it is imperative that your lifestyle plan is flexible and constantly reviewed.
Life is like a movie that you direct. You have the power to write your own script and therefore create your own ending. Seek professional advice, help and support from experts who can guide you and help you avoid unnecessary risks.
Yorkshire Powerhouse thoughts on understanding cash flow – business & personal
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