Do you try to make a perfect cash flow, but not everything works out properly? This is a problem that many companies face and they make simple errors that hurt their cashflow without realizing it.
To prevent this from happening, we’re offering 8 tips for you to manage your cashflow perfectly. However, in order for you to apply them more accurately, let’s first look at the concept of cash flow. Keep reading!
What is cash flow?
Cash flow is an essential tool to control company expenses. Allied with the budget, it is a powerful instrument for a smart management, guiding partners to make more accurate future decisions.
In any organization of substance, the accounts function in the same manner. Money enters, usually from client payments, and money exits to pay bills. These financial movements don’t take place on the same day, but during a period established by your closing day – which usually occurs every month. Managers need to know how to manage cash flow in order to optimize the company’s financial management.
The perfect cash flow will help anticipating future needs or surpluses of resources, allowing you to schedule loans or investments. This anticipation will increase the company’s financial efficiency, which will pay for lower interest rates on credit operations or get higher fees for bank investments.
How to make a perfect cash flow?
For those who have never kept a cash flow, starting it can be challenging, but there are not many complications. With time and the good results obtained, the practice will become a habit. You just need to follow some tips from experts on the subject to ensure that yours comes out perfect. Check it out!
1. Categorize the payments that enter and exit your accounts
The first step towards a perfect cash flow is to categorize the company’s revenues and expenses, because that way, you will know clearly from where the higher profit comes from, and what generates the higher expenditures. Thus, you can cut expenses more easily in times of crisis, for example.
In the inflows, you can separate the amount that comes from payments of your current customers from those payments that originate from old debts, for example. In the outflows, there may be categories for expenses with inputs, fixed accounts, funds for marketing, payments of employee salaries and benefits, among many others. The categories may vary, depending on the profile and size of the company.
2. Be aware that sales is not the same as revenue
It is very important to understand that sales are different from revenue. In the cash flow, sales should only be entered when they are effectively received, that is, when they become revenue. Many companies sell with credit cards, for example, and in this case, the money is only actually received after 30 days or more.
Another point to consider is the probability of default, that is, of not receiving for a sale made in installments, with checks or duplicates. Therefore, in addition to entering sales only in the month scheduled for receipt, you should be conservative and take into account that a portion of sales will not be received.
Over time, it will become easier to project this default based on your customers’ behavior. Depending on the nature of your business, these defaults may be higher or lower than the average for other economy sectors.
3. Don’t mix personal expenses with company expenses
This tip is very important for small companies and for freelance professionals. You can harm your company’s financial health by mixing your personal expenses with your company’s accounts. Getting money from your company’s accounts to pay a personal expense is therefore something that you should avoid. The ideal is that all of the company’s partners have a salary that they use to pay their own bills without harming the organization’s cashflow.
4. Record all financial transactions
Entering all inflow and outflow transactions, even those of lesser amount, is essential – especially for small businesses. It is also necessary to consider unforeseen and potential expenses, as well as seasonal factors (revenues and expenses that occur at certain times of the year). This is intended to more accurately project the size of the cash reserve that will need to be maintained in order to prevent the company from going into the red.
5. Think long term
The more variables you are able to include in the spreadsheet, the easier it will be to outline a projected cash flow for a longer period. This will make it possible to make plans for production expansions, technology updates or other important decisions more safely.
6. Carry out daily control
In large companies, partners do not need to be supplied daily with details on the cash flow, which is the responsibility of the finance department. In smaller companies, however, the owner or director has to control daily inflows, outflows and forecasts of financial transactions. This control will allow you to better understand the business performance and customer behavior, helping to fine-tune the company’s management.
7. Don’t overlook the importance of metrics
Cash flow will aid in the generation of reports and charts that can help you a lot in controlling your business finances. Do not underestimate any data obtained with the analysis of the entry of inflows and outflows. In some cases, you may even be surprised by the results and, from them, take advantage of opportunities, change directions or outline even more accurate strategies for your company.
8. Use a cashflow management software
You can do the cash flow at the tip of the pencil, or even fill out a blank Excel spreadsheet on your computer. But it is very risky and laborious, as well as being more susceptible to errors. Using management software is more indicated.
There are various models of management software on the market, with some which are free and somewhat limited, and others that you need to buy but which come with a wider variety of resources. You should see which is the most appropriate for your company’s situation. If you want to learn more about this, read this Wave blog post, which teaches three methods for calculating the company’s cash flow.
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