Cash flow is the heart of a business. Cash flow determines if your business will prosper or fail. A positive cash flow provides good return of investment while a negative cash flow means that you are draining money in your business.
Whatever kind of business you have, you must have the right cash flow management skills. Attention to details in the early stages of your business will pave the way for success. Here are some pointers I learned from Rich Dad Coaching Program to help you contain and direct your cash flow in your business.
– Call on an accountant, banker, or financial consultant for advice in structuring your cash management system.
– Delay taking a salary until your business is generating cash flow from sales. If you’re terribly strapped, keep your day job and start your company part time.
– Review your cash position daily, looking at cash sources and needs for the coming week, month, and quarter. This way you can plan for any large cash need before it becomes a crisis.
– Keep a close eye on your ratio of assets to liabilities. This will enable you to move quickly when money needs to be borrowed. Be alert when liabilities rise over assets. You should be generating enough cash flow to pay for those liabilities.
– Bill customers as soon as your product is shipped or your service provided. Do it outright. Don’t delay.
– Require payment up front until credit has been earned by your customers. Business customers need to gain your trust before you can avail of credit.
– Pay your bills promptly, but ask for extended-payment terms from day one. Ask for extended-payment terms again after you’ve made several timely payments.
– Keep your overhead to a minimum. Don’t purchase anything new—such as a copy machine—until sales justify the purchase. You must examine your expenses thoroughly. Expenses are negative cash flows and if not managed properly, it can eat your business.
– Invest your cash on hand to maximize its earning potential. If you have extra cash in your business, try to look for other investments options where it can generate the highest yields.
– Establish tight internal controls over the handling of cash.
– As your business grows, continue to keep a close eye on cash management. Losing sight of cash flow during expansion is a common reason businesses go under.
– Make sure your bank account is reconciled by someone other than the person preparing checks or signing them. Always have a check and balance.
Rich Dad Tip:
“The ability to run a company from financial statements is one of the primary differences between a small business owner and a big business owner.”
Follow your cash from receipt to deposit, from purchase order to writing the check, and have an outside accountant review your system to make sure you have adequate internal control procedures.