Every entrepreneur daydreams about growing their cash flow. It’s one of (if not the) most important stat lines when measuring a successful business. You want to see it go up, up, up!
On the surface it sounds easy, just make more money than you spend! But in reality, there are many forces that can drive cash flow (in the right and wrong direction). It is important to focus on these driving factors to improve the success of your business.
Which forces drive cash flow?
There are five main forces that directly impact the growth of your cash flow when properly managed:
Tracking and Accountability
Accounts Receivable
Budget Variance
Vendor and Partner Terms
Product/Service Pricing
Each of these requires a lot of attention. However, with proper execution, you will see a huge amount of growth in no time.
1. Tracking the Right Financial Elements
Tracking is potentially the most important force that drives cash flow.
No matter how hard you work, the key is making sure the data points to the results you want. By tracking what’s happening, you give yourself a scorecard to help achieve your goals. This scorecard, creates accountability to keep you on track.
Because there are multiple facets that affect cash flow, having them organized in a way that is easy to read and shows the most significant measures for your business, will improve the way you analyze your metrics. When you have meaningful reporting, you can track how well those metrics are performing and make adjustments with the goal of improving cash flow in mind.
Not only can you make these adjustments with real-time numbers to employ immediate changes, but you can also use historical numbers and create a plan to improve long-term cash flow as well. Budgeting based on historic metrics and cash flow results will play a huge role in the growth of your business. Be sure to properly track cash flow so you can not only maximize the growth of your business, but also the success.
2. Accounts Receivable
Accounts receivable can play a tricky game with your cash flow reports. Because your cash flow is reflective of the amount of money coming in and accounts receivable is more of an “IOU”, a high number in the accounts receivable column can negatively affect your cash flow, making it look like you have more money than you really do. This causes problems when analyzing other metrics (like your budget) and leaves your business searching to figure out what your incoming funds really are.
The good news is, this is avoidable for the most part. It is important to:
Collect payments on time
Track exactly how much you are owed
Be aware of what’s past due
The longer a payment goes unpaid, the less likely you are to receive it, so staying on top of this is important.
When you put these into practice, your accounts receivable will be lower, which will increase your cash flow. A lower accounts receivable will give you a much better estimation of what you actually have, as opposed to what you will have.
3. Budget Variance
Budget variance compares your predicted budget to what you actually spent. It is a helpful tool when analyzing where you made a mistake and why. Because it focuses largely on expenses, using a budget variance will point you towards where you are spending more money than you should be.
The idea is that you will use your findings from your budget variance analysis and make adjustments to your budget to ensure a more steady cash flow. You can picture these adjustments as a plug to the holes that are draining your cash flow. Once the holes are plugged, your cash flow will continue to rise.
4. Vendor and Partner Terms
Every business goes into a contract with a vendor, a partner, or both. These contracts could be for anything from raw materials, cost of goods sold, or hosting/server space. While these contracts are essential for your business, they can also cost a pretty penny.
To optimize your cash flow, be sure you are keeping up with these contracts. Make sure you know the terms and are timely with your payments. Falling behind will affect your budget and your cash flow. If at all possible, negotiate your terms. You always want to be getting the best deal for your business and sometimes the easiest way to do that is to ask.
5. Product/Service Pricing
It’s no secret the sales of your product or service are what drives revenue. A positive cash flow is reliant on your revenue exceeding your expenses. This means it is imperative to set the right prices.
You should develop prices based on what works based for your business and your revenue goals. Some examples of different ways to base your pricing include:
Product-based pricing: Product-based pricing is setting your price to reflect what you believe the product is worth. It can be risky and requires confidence in your product.
Cost-plus pricing: Cost-plus pricing is using the cost of the product, adding what you’d like to make as a profit, and selling it for that price.
Value-based pricing: Value-based pricing relies heavily on what the customer is willing to pay.
Competition-based pricing: Competition-based pricing uses your competitor’s rates to set your price.
If you’ve set your prices correctly, you should have a positive cash flow.
However, if your expenses are in check and accounts receivable are up-to-date, cash flow problems could extend from underpricing, marketing or sales. If this is the case, you need to reevaluate the way you price your products/services.
Partner with an Experienced Accounting Service
Having a trusted partner is one of the easiest ways to build cash flow in your business. An experienced accounting service will walk you through everything listed above; tracking essential metrics, managing accounts receivable, analyzing budget variance, understanding your vendor and partner terms, and even assisting in setting the right prices for your product/service.
With all of these driving forces in place, and with experts backing you up, you will soon start to see a growing cash flow. One last bit of advice: don’t wait. Start implementing the steps it takes to build your cash flow now, so you don’t have to look back and wonder what you could’ve done better.
If you are looking for an experienced accounting service, Simply Financials Plus offers everything you need to track, improve, and build your cash flow!