5 steps to Positive Monthly Cash Flow

Anticipating your cash flow may seem to be something that you just can’t do. But when you follow these 5 steps, you avoid many cash flow problems before they happen and take steps to keep your cash flow positive. Learn more in this week’s blog. 

Having enough cash available for your business is critical to its survival. The Bureau of Labor Statistics publishes a table of survival rates for new businesses.  Those statistics show that over the last twenty years, about 50% of new businesses have failed within 5 years of beginning and by year 10, that number has grown to about 65%.  See the table HERE.  Employees and vendors like to be paid on time.  You want to be in the 50% that stay in business.  But how do you know when your cash is going to be low before it happens so you can do something about it?  

These 5 steps will help you maintain positive monthly Cash Flow.

1. Prepare a well thought out budget.  A well thought out budget will help you see when your projected cash flow is going to be negative.  When you are developing your budget, a number of factors can affect your cash. Learn to plan so that you are able to avoid having your cash flow go negative.  These factors include timing of expenses, purchases of equipment and buying items that do not generate or support revenue.

2. Plan for Equipment Replacement.  Equipment wears out as you use it, so one of the best things you can do is fund a savings account for replacing your capital items.  When it comes time to replace them, you already have the money put away to make the purchase. 

Funding this savings account goes into your budget, but doesn’t affect your profit.  Keep these funds separate so you don’t use this money for anything but capital replacements.  The money will not be available in your operating cash, but because the amounts are just a portion of what the item costs, it doesn’t have a large effect on your cash flow. 

The savings account will have a big effect when you need to purchase new equipment.  Instead of having to find or borrow money, you can take it out of your savings fund.  This also puts more money in your pocket as you avoid paying interest on credit cards or loans to make those purchases.  You keep the interest payments and associated loan fees in your pocket by not borrowing  or using a credit card to purchase your equipment.

3. Plan your discretionary spending.  Your budget is also a great tool to use to help you plan your discretionary expenses.  Discretionary expenses are things like new uniforms for your staff or mugs that you give away as a perk to your customers.  Because you can plan this spending , you have more control over the timing of the purchase.  Your cash flow budget allows you to see when purchasing these items will not cause your cash go negative.  Right before a holiday may not be the right time to purchase these perks. Use your cash flow budget to help determine the best time.

4. Deal with potential shortages before they arrive.  Another way that your budget will help you with your cash flow is by allowing you to see those months where you are running at full capacity and months where you have the ability to do more. Knowing whether you have the capacity or not allows you to plan ahead to do those things that will increase revenue in those slower months. That increased revenue can give you extra cash to put into a savings account to cover your cash flow shortages. 

 Generating extra revenue during these slower periods, allows you to smooth out both your cash and your schedule.  This also gives you options for dealing with a deficit ahead of time or even prevent a deficit altogether. 

It is crucial to complete your budget a couple months before the new year begins, allowing you to be on track right away when the new year begins.  You’ll have time to make adjustments and keep your business running smoothly at the beginning of the year.

5. Use your budget to see how you are doing and make changes when needed.  Do this by comparing your actual results to your budget each month to see if any adjustments are necessary in your operations.

 If you see the need to make a change, your budget can help you do what-if analysis of the potential changes you want to make. You can see the numeric effect of the changes of a proposed change you want to make, including the effect on your cash flow.  This is a great way to test the economic effect of those changes. 

If you know that you have a projected cash flow shortage coming up, sometimes the answer may be to do a pricing adjustment to bring in more cash instead of trying to increase your number of sales.  The sooner you can put a price increase into effect, the smaller it can be to solve the issue.  Using your budget file will allow you to see how different changes will affect your finances. 

A well prepared budget is a great tool to use to help you keep your monthly cash flow positive.  These 5 steps will help you keep your cash flow positive and give you time to proactively deal with potential issues before they become emergencies that take you away from serving your customers. 

To learn more about cash flow and budgeting, sign up for my upcoming free online Cash Flow Workshop HERE.  I will email you when the next workshop is scheduled to begin as well as sending you a link to each new weekly post in the Budgeting Essentials Blog! I will be teaching my Cash Flow Workshop soon, so don’t miss it!

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God Bless your week!