Positive cash flow is a must for any growing business. This indicates that they are managing their resources effectively. They have enough cash for operations and growth. However, maintaining positive cash flow is often difficult for some companies. They struggle to balance their cash inflows and outflows for a variety of reasons such as overspending, no business plan, and poor inventory management just to name a few. This is why establishing objectives is important for positive cash flow management.
These are some of the cash flow goals you can set for your growing company.
Monitor Your Margins
Monitor the gross and profit margin of your business. The margins to maintain profitability vary depending on the niche but a healthy number is around 10-20 percent. Factors that have either a positive or negative impact on your margins are labour costs, materials, and the pricing of your products and/or services. Find the right balance of cutting costs without having a negative effect on the services or products you offer. You might also want to consider outsourcing tasks such as bookkeeping, marketing, customer support, warehousing, and others to reduce your operational costs.
Set a Salary
Some new business owners forgo their own salary or take only a small amount for the sake of developing their business. This practice often continues even if their company starts to generate profits. This might seem like a viable approach to help your business grow, but if things go wrong it will have a negative effect on your personal finances. Learn to pay yourself by setting a salary aside from the profits your business generates.
Have Enough Reserves
Positive cash flow management and goal setting involve having enough cash reserves. Monitor the liquidity of your business. Doing so allows you to get an overview of your business’ financial position. Can it meet short and long-term dues? Can you sustain profitable operations in the short or long-term with your current cash flow? Your answer to these questions determines the cash reserve amount you need to maintain. You should at least keep cash reserves that can last up to four weeks of operations. The ideal cushion is a cash reserve that lasts up to 90 days.
Plan for Growth
One of the aims of businesses is growth. You need a positive cash flow to achieve this goal. Too much debt and overextended receivables constrain your cash flow and may be one of the reasons your business fails. Set money aside for investments and growth; these can be used for developing new products or services, improving customer service, expanding to a new location, increasing your customer base, and others.
Manage Debt
Companies should not avoid debt completely. You will need short or long-term debt to finance your company’s growth and operations. Learn how to manage debt and keep your cash flow positive. Pay dues on time to avoid penalties and other additional fees. Only borrow money you can pay on time and within your cash limits.
These cash flow management objectives allow you to balance your budget, reduce costs, and maintain a profitable business. If you need help with some bookkeeping and accounting tasks, we at Robookkeeper are at your service. We offer first-rate small business accounting services.
