5 tips for creating your cash flow system

A good Cash Flow system does more than just take money in and send money out. You need to have a purpose behind what you do. Learn more in this week’s blog.

You may think that cash flow is just about paying the bills. Paying the bills is just part of a good Cash Flow System. With a good Cash Flow System, in addition to paying the bills, you are also able to manage your finances and improve your entrepreneurial business. Use these 5 tips to create your cash flow system. 

1. Develop a consistent cash flow routine 

A consistent routine allows you to make meaningful comparisons from month to month. These comparisons help you see changes that are affecting your cash and your business. 

A routine also helps ensure your regular bills are paid consistently from month to month. Just as you like to be paid in a timely manner, you should also pay your vendors timely. This helps maintain good relationships with your vendors that can help you when you need priority from the vendor. This will also save you money on late fees, especially with utility companies. 

A possible schedule you could use would be to pay utility bills the 2^nd week of the month and doing a full analysis and bill payment the 4^th week of the month.    The due dates of your bills should be a determining factor in the schedule that you choose.  Remember, it is important to be consistent so you are always looking at the same bills at the same time each month.

2. Pay your operating reserve first

Paying your operating reserve first is a key to good cash flow management.  Paying your operating reserve should be done as consistently as you would pay an employee of the business.  Pay your operating reserve, your bills and make sure what is left over matches your cash flow budget.  If what remains is more or less than your budget, you have a problem that you need to investigate. 

Discovering and understanding that difference allows you to learn more about your business. Then you can take appropriate action based on what you discover. Your actions will be more appropriate when they are based upon facts. 

3. Use a well prepared budget 

Using a well prepared budget as part of your cash flow system makes the difference between just paying bills and managing your finances. If you don’t have a budget, you don’t know when you are off plan. You won’t know you have a problem until you have a crisis. Often by the time you reach crisis stage it is too late to recover from the issue. You won’t have reserves to help you get through. This can shut your business down. Don’t ignore your budget. 

4. Use reserve accounts

Don’t rely upon current period cash to pay periodic expenses.  Periodic expenses are bills that are not paid every month like the electric bill.  If you have expenses that you pay annually, you should be putting part of that bill away in a reserve account (savings account) every month.  You should have reserves for each item you pay periodically.  You don’t need to have a separate account for each item, but you do need to keep track of each individual item in the account.  Fund this account by transferring 1/12th of the money into the account every month, just like it is a bill.  Then at the end of 12 months, when it is time to pay this bill, all of the money has been accumulated to make the payment.  Don’t use these funds for funding emergencies.  You should have a separate reserve for emergency funds.

5. Review your income and spending 

When you do your monthly analysis, review your income and spending at the same time.  This is a great time to review your financial statements.  Cash flow and financial performance are closely linked.  It makes great sense to review them together.  You will often find the explanations for your cash variances in your financial statement.  Sales variances, over spending, missed bills and more can be found in your financial statements. 

These tips are not everything you need to know about a cash flow system, but they are great for getting you going.  Just as each company is different from another, so your cash flow system will be different also.  The important thing to remember is that you need a system.  Begin today.

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God Bless your week!