Understand the Importance of Cash Flow and Monitor It
Do you know the status of your business’s cash flow right now? What about six months from now? How confident are you that your business would be able to ride out any dry periods where cash outflow exceeds incoming cash? To stay clear of any cash flow problems, first appreciate how important cash flow is. Then understand the basics of cash flow management and accounting so that it’s easier for you to keep tabs on your firm’s financial health. And finally, have systems in place that ensure that you and/or other key financial personnel monitor your cash flow regularly.
Value it. Research shows that poor cash flow is the reason behind about 80% of small business failures. According to the U.S. Bureau of Labor, and as discussed in this Inc.com cash flow article, two-thirds of small businesses survive two years, only 44% make it through four years, and just 31% last seven years. With sufficient cash flow, you can greatly increase the odds of your business surviving and thriving. The first step is to recognize and appreciate how essential positive cash flow is to your business. It is one of the most important things you can do as a new business owner.
Understand it. Learn the basics of monitoring cash flow. Every business owner could probably benefit from a basic accounting course. Learn what the most important measurements are to apply to your business’s financial health, even if you have designated experts on staff. Delegation is important and necessary, but the buck ultimately stops with you. Being able to understand financial concepts and the language of accounting better enables you to evaluate the financial health of your business.
Monitor your cash flow. Armed with good intentions and basic knowledge, you can now monitor your business’s cash flow. Look at your current financial situation, but also pay attention to patterns, such as how long certain clients take to pay their bills. If problems arise, it can be critically important for you to be able to pinpoint the causes early so that you can act on them effectively.