Six Steps to Managing Your Cash Flow

Author: Larry Chester, President

Everyone has a checkbook. If you think about it, your personal life operates just like your business, but it’s on a cash basis, rather than an accrual basis. You receive money and you pay it out. You can’t pay out more than you have. This is called your business’ cash flow. 

The balance in your checkbook is what you must work with. No more, no less. And, if you have a savings account that you put money into regularly for retirement or vacation plans, you’re practicing accrual accounting at home.

Your business is similar. You have money coming in and money going out. Here’s a simple, six-step process to manage cash flow in your business. But first, what is cash flow management?

What is Cash Flow Management?

In its simplest terms, cash flow management is “the process of understanding and optimizing the amount of money, cash and non-cash, moving into and out of a business.”

Why is this important? Cash flow management helps:

• Predict how much money will be available to your business, and
• Identify how much your business needs to cover debts

Now, let’s dive into the six-step process to manage cash flow in your business.

#1: How Much Money Do You Have Today?

This is your bank balance. Be sure to deduct checks you’ve already written or other pending payments.

#2: How Much Are You Going to Collect Over the Next Week?

Don’t guess. You know who pays their bills on time. Consider the money that you KNOW will come in. You can’t pay bills with a wish and a prayer.

#3: What Bills Have You Received That You Need to Pay?

These aren’t just the bills you received this week. It also includes:

• The invoices that you have entered into accounts payable, and
• The bills that you’re waiting to enter

You need an accurate picture of what you owe.

#4: What Other Payments Are You Going to Make?

You don’t get invoices for all your bills. Some payments are repetitively automatically deducted from your account. For example, your rent, phone, utilities, maybe insurance, bank interest, and lease payments are often set to auto payments. You need to include those as well.

#5: Prioritize the Payments by Category

Payment types can be categorized based on their level of priority. This may include:

• Critical
• Should Pay, or
• Can Delay

Auto payments coming directly out of your bank account are considered “critical.” Your payroll and bank payments are critical. Most suppliers are likely “should pay” but some suppliers might be able to be delayed.

#6: Put This Information Into a List

Start with your existing cash reserve, add in your receivables, then subtract your critical upcoming bills.

What’s left? Use that for your second calculation, your “should pay.” Do you still have money left? Prioritize your “can delay” payments, and start subtracting those.

Cash Flow Management

This is cash flow management. Do this regularly to reduce or even eliminate surprises. Your part-time CFO is ready to help you put together a cash management plan to take the uncertainty off your desk.

Interested in learning more? Read on for the top five cash flow tips for entrepreneurs.