It’s been said that cash is king, so it’s no secret that managing how much is coming and going is essential for both individuals and business owners. But how do you manage it?
Today we’re diving into the importance of cash flow management for individuals and businesses and, most importantly, how to create a cash flow plan that supports your business and lifestyle.
Ready? Let’s jump right in!
The Significance of Cash Flow Management
Cash flow refers to the net cash and cash equivalents transferred in and out of a company or personal bank account. Further, the cash the person or company receives is labeled as inflows, while the money the organization spends is outflows.
- Positive cash flow: More money coming in than being spent
- Negative cash flow: More money being spent than incoming
It’s probably somewhat obvious that a company needs cash to function correctly, but why else is cash flow management so important?
An organization with a poor grip on its cash flow management can cause additional financial stress, limited growth opportunities, and ultimately could need help meeting their expenses or obligations.
None of those things appeal to business owners, so let’s go through how to have a firm handle on your cash flow management for your business and your personal life.
Assessing Your Personal and Business Financial Needs
To determine how much money a person or business needs coming and going, you must first establish your goals, approximate expenses, and overall desired income.
Let’s first start with goals. Where do you see yourself or your business in 1 year, 5 years, 20 years, etc.? It can be helpful to try and set SMART goals where you can – Specific, Measurable, Actionable, Realistic, and Timely. Focus specifically on attainable and realistic goals for your business.
Let’s look at an example of some short and long-term goals a business owner might have:
- Short-term Goal 1: Hire three more employees within the first year of business.
- Long-term Goal 1: Develop a marketing strategy that boosts traffic to your website.
- Short-term Goal 2: Generate 50% of the yearly sales goal by June 1.
- Long-term Goal 2: Increase customer satisfaction with services and products.
- Short-term Goal 3: Generate enough income to purchase a business-specific space and give your home back more living space for your family.
- Long-term Goal 3: Save enough money to be able to retire early at 60.
Now, with these goals in mind, what are some of the potential related expenses?
- Short-term Goal 1: Pay for new employees’ salaries, benefits, and training time.
- Long-term Goal 2: Hire an internal marketing employee or outside consultant and pay their salary or project rates.
- Short-term Goal 1: Employee time working with customers to complete sales and additional marketing initiatives to generate traffic.
- Long-term Goal 2: Create or find additional employee training opportunities, and hire an outside consultant to develop solutions to solve any potential downfalls in service or products.
- Short-term Goal 3: Research your desired location to see approximate price ranges.
- Long-term Goal 3: Save enough money through retirement savings accounts, health savings accounts (HSA), etc., to afford both leaving your business and retiring early.
Now that you know what type of financial need your business has, it’s time to look at ways to track, budget, and keep your personal and business cash flows organized.
Strategies for Balancing Personal and Business Finances
One simple yet effective way to organize your business and personal cash flow is to keep the funds within separate accounts or even at separate institutions. This way, you’ll be able to simplify any tracking or transactions.
The second is creating a realistic budget for personal and business expenses. Budgeting, for some, can be challenging to follow, so it’s crucial to create a budget that you’ll be able to stick with. To do that, be aware of all of your income sources, fixed expenses (like bills or utilities), review your past spending patterns to get a reasonable estimate of your variable expenses (groceries, transportation, personal care, etc.), and any annual expenses (like subscriptions, holiday gifts, car maintenance, etc.).
In addition, you’re more likely to stick to a budget if it’s tied to your personal and business goals. For example, if your business goal is to hire a marketing employee or consultant, you might have to make some room in your budget for that expense. Think creatively about where you can cut in ways that won’t negatively impact your business or employees. For example, if your employees are doing well in training and supplies, take a break from allocating money to that fund and instead put it towards marketing. You can then adjust your budget as necessary to meet your goals.
Lastly, keep your finances organized by diversifying your income streams, AKA finding different sources of income beyond your primary business. Some examples include freelancing or consulting, starting a podcast, investing in stocks and other assets (like real estate), taking advantage of royalties and licensing (if you have creative works like music, art, or writing), etc.
Effective Cash Flow Management Techniques
Managing your cash flow doesn’t have to be complicated. We have a few tips to help you!
The first is by utilizing a strategy called cash flow forecasting. This involves projecting the future inflows and outflows of cash for your business over a specific period. The main goal is to help you anticipate the cash movement in and out of your accounts, giving you the knowledge you need to plan and make informed financial decisions.
You can cash flow forecast by following these steps:
- Collect historical data – analyze your past cash flow statements and financial records to understand your typical cash flow patterns.
- Project sales – estimate your future sales revenue based on your forecast and expected market conditions.
- Expense estimates – Estimate your expected expenses (just like you did when creating your budget).
- Document your assumptions – Any future forecasts you make will depend on your market conditions, customer behavior, and past cash flow statements and financial records. Keep track of all these things to make future projections even more accurate.
You can also use various online tools or software to help your forecast be more accurate.
The second tip is to ensure you manage your business’s accounts receivable and payable. Do this by setting clear payment terms and policies for you and your customers (for example, all invoices you receive must be paid within 60 days) and monitoring and following up on any outstanding invoices. Doing these things will make your quarterly (or whenever you choose) business cash flow statements as accurate as possible.
Emergency Fund and Financial Reserves
Life is genuinely unexpected and uncertain. Whether it’s the loss of a job or a prolonged sickness or hospitalization, expenses can add up quickly if you’re unprepared. This is why every solid financial plan accounts for an emergency fund.
A personal and business emergency fund will help you mitigate unexpected expenses and reduce your reliance on credit during potential downturns.
If you’re unsure how much your emergency fund should be, you’re in luck because if you’ve followed along, you likely already have all the information you need. Just like with your budget and forecasting, consider your personal and business expenses when determining how much you should have in your emergency fund.
Continuous Monitoring and Adjustments
Unfortunately, managing your cash flow isn’t a one-and-done type of deal. Regularly reviewing and analyzing cash flow statements is essential for a healthy cash flow plan.
Close monitoring allows you to adjust personal and business finances as needed. Identifying areas for improvement or cost reduction, or adapting strategies to changing business and market conditions can help you be proactive in your cash flow management efforts and make your plan more successful.
Seeking Expert Assistance
Of course, you’re never alone when creating a financial or cash flow plan. Consulting with a financial advisor or accountant to receive expert guidance on cash flow management strategies and optimizing tax planning and financial decisions can be highly beneficial, especially for business owners.
As fellow business owners, we know that implementing effective cash flow management practices will only help you in the long run in terms of long-term business sustainability and personal financial sustainability.
If you’re ready to start your cash flow management plan or have other questions related to financial planning for business owners, please contact a member of our team today.