Monitoring cashflow is an essential part of running a successful business. It involves keeping track of the money that is coming in and going out of your business whilst ensuring that you have enough cash on hand to pay your bills. In this blog, we will discuss five tips on how to monitor cashflow effectively but firstly…
What is Cashflow?
In business, it refers to the movement of cash in and out of a company; it’s the money that flows through a business and includes all of the cash inflows and outflows. Cash inflows include the money that a company receives from sales, investments, loans, and other sources, while cash outflows include the money that a company spends on expenses such as rent, salaries, inventory, and other costs.
Managing cashflow effectively is essential for the success of a business, as it ensures that a company has enough cash on hand to pay its bills, invest in growth, and weather any unexpected financial challenges.
Let’s see how we can get started…
Create a Cashflow Statement
The first step in monitoring cashflow is to create a cashflow statement. This statement will show you the amount of cash that you have coming in and going out of your business, as well as your net cash flow. This will help you to identify any issues before they become a problem.
👉 To create a cashflow statement, start by listing all of the cash inflows (such as sales revenue and loans), then list all of the cash outflows (such as expenses and loan payments). The difference between the inflows and outflows will give you your net cash flow.
Review your Accounts Receivable and Accounts Payable
One of the most common issues is a high accounts receivable balance or a high accounts payable balance. Accounts receivable refers to the amount of money that your customers owe you, while accounts payable refers to the amount of money that you owe to your suppliers.
Reviewing your accounts receivable and accounts payable regularly will help you identify any overdue payments or slow-paying customers. If you find that you have a high accounts receivable balance, you may need to take steps to improve your cash collection process. Similarly, if you have a high accounts payable balance, you may need to negotiate better payment terms with your suppliers.
Forecast your Cashflow
Forecasting your cashflow is an essential part of managing your business finances. By creating a forecast, you can predict how much cash you will have available in the future and identify any potential issues.
👉 To create a cashflow forecast, start by projecting your sales revenue and expenses for the next 12 months. Factor in any expected changes to your cash inflows and outflows, such as new product launches or changes in your payment terms. By doing this, you can identify any potential cashflow issues and take steps to address them before they become a problem.
Manage your Inventory
Inventory management is another critical factor in management. If you have too much inventory on hand, it can tie up your cash and reduce your available working capital. On the other hand, if you have too little inventory, you may miss out on sales opportunities.
👉 To manage your inventory effectively, you should track your inventory levels regularly and reorder products when necessary.
👉You should review your inventory turnover ratio, which measures how quickly you sell your inventory. A high inventory turnover ratio indicates that you are selling your products quickly and efficiently, which can improve your cashflow.
Monitor your Cash Reserve
It is essential to monitor your cash reserve regularly. Your cash reserve is the amount of cash that you have on hand to cover unexpected expenses or short-term cashflow issues.
👉To maintain a healthy cash reserve, you should regularly review your cashflow statement and cashflow forecast to identify any potential issues.
👉Set aside a portion of your profits each month to build up your cash reserve.
Monitoring cashflow is critical for the success of your business. By creating a cashflow statement, reviewing your accounts receivable and accounts payable, forecasting your cashflow, managing your inventory and monitoring your cash reserve, you can improve your cashflow and ensure the long-term financial health of your business.
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