Relationships and businesses are like sharks. Both need to keep moving—and continually improving—to remain alive. When it comes to business, two ways to keep moving forward include: looking at relevant KPIs to focus on what needs to improve and; forecasting when you might have cash gaps in the future.
A common, unfortunate question often asked of our small business clients is: Why are my sales booming and margins look OK, yet I am scrambling to pay vendors?
Cash flow equals survival for all businesses. Even businesses with great profit margins can fail if cash flow is not managed correctly. Successful businesses need to pay attention to each facet of cash flow, not just daily bank balances. Some metrics to review include:
Raw data and standard financial statements are part of what you need to evaluate where you are headed. Ideally you will use a system that creates clear, readable signals that you can trust, and ideally you are able to see those often. Depending on your line of business, quarterly is the minimum period for evaluating these metrics.
Using financing sources other than cash on hand is often a good strategy, but a healthy business does this according to plan, not when it is unpleasantly surprised by shortfalls. Many businesses experience seasonal cycles of being flush versus having to draw on a line of credit. Mapping out those expectations in the year ahead can help a business to create the most efficient strategy when using those funding sources, avoiding higher risk areas and avoiding missed opportunities.
Many businesses have an annual budget on the to-do list. However, making that budget flexible throughout the year and incorporating a cash flow element is what really brings your budget to life and benefits you in a real way.
Finding the right tools—and the right team—to help you create this process and understand the results will be key to your success.
Looking for more accounting and bookkeeping tips and best practices information? Here is a blog on how to develop a solid accounting foundation with your chart of accounts.