A central duty of every entrepreneur is cash management. Although making sales is essential, failure to maintain scrutiny over cash needs will chip away the rewards of growing revenue. Keeping accurate accounting throughout the year of revenue and expenses is the crucial starting point. Cash outflow for past expenses is a good guideline for assessing upcoming cash needs. Stay aware of your recurring monthly operating costs. But you have to dig a little deeper construct a workable design for the future.
Expenses only partly explain how business cash is used. You may also have loan repayments and equipment purchases. Always know the upcoming amounts by which you must reduce debt that appears on your business Balance Sheet. The original costs of fixed assets, such as equipment, are also on the Balance Sheet, along with the amount of these costs that has been deducted as depreciation. As these assets become fully depreciated, likely replacement looms on the horizon.
After determining the full amount of your cash needs over the next three to six months, identify how much revenue you anticipate. Never assume you will be paid when expected. Add a buffer of one more month past the normal due date of your receivables. More revenue is earned as your business grows, but the payments will tend to arrive later. Meanwhile, your rising operating costs must be paid while you’re waiting to collect income.
Cash management plans may indicate that you should ask some clients for retainers as your business builds. Or you might need to seek borrowing channels in advance of impending cash constraints uncovered by planning ahead.
The Finance Writer 