10 things to do to monitor your cash flow in your business
Regularly Review Financial Statements: Start by regularly reviewing your profit and loss (P&L) statement and cash flow statement. Programs like Xero and MYOB have great resources and templates that will help you with these. These statements provide insights into your business's financial performance over a specific period.
Analyse Revenue and Expenses: Monitor your revenue streams and expenses closely. Identify trends in sales and costs to determine if your business is operating profitably. Look for areas where you can cut costs or increase revenue.
Calculate Gross and Net Profit Margins: Calculate your gross profit margin (gross profit divided by revenue) and net profit margin (net profit divided by revenue). Make sure you understand your true cost of goods. These metrics indicate how efficiently your business is generating profits relative to its revenue.
Track Cash Flow Trends: Monitor your cash flow on a regular basis to ensure you have enough liquidity to cover operational expenses, debt obligations, and investments. Look for patterns in cash inflows and outflows to anticipate potential cash shortages or surpluses.
Forecast Cash Flow: Develop cash flow projections to forecast future cash inflows and outflows. This helps you anticipate periods of cash shortages or excess and take proactive measures to mitigate risks or capitalise on opportunities.
Manage Accounts Receivable and Payable: Keep a close eye on accounts receivable (money owed to your business) and accounts payable (money your business owes to suppliers and creditors). Implement strategies to expedite receivables collection and optimise payment terms with vendors. Reconcile your accounts regularly.
Monitor Inventory Levels: If your business involves selling physical products, monitor your inventory levels closely. Striking the right balance between maintaining adequate stock levels and minimising excess inventory helps optimise cash flow.
Assess Debt Levels and Financing Options: Evaluate your business's debt levels and explore financing options to optimise your capital structure. Consider refinancing existing debt at lower interest rates or negotiating favourable terms with lenders to improve cash flow.
Implement Cost-Cutting Measures: Identify areas where you can reduce expenses without compromising quality or productivity. This may involve renegotiating contracts with suppliers, optimising operational processes, or eliminating non-essential spending.
Diversify Revenue Streams: While diversification is important, don't spread yourself too thin. Focus on the 20% of revenue streams that generate 80% of your profits—the good old 80/20 rule! Ensure you have a balanced approach to diversification and prioritise revenue streams that are most profitable.
