Why cash flow analysis may be the single most important area for small business owners to focus their efforts.
Who has time to manage their company’s cash flow when there are bills to be paid, products to be made and inventory to order? We get it. Small business owners are among the busiest, hardest working people out there.
While managing your cash flow can feel like a daunting task, it doesn’t have to be — and even minimal effort is well worth it. Consider these 5 reasons why cash flow analysis is crucial to the success of your business.
Qualify for a Small Business Loan
Access to working capital is a challenge most small business owners face at some point. Getting a handle on your cash flow can significantly improve your chances of getting approved for a small business loan.
While different types of lenders have different requirements when it comes to qualifying for a loan, one common factor unites them all: cash flow. The strength of your company’s cash flow is one of the primary factors that lenders consider when reviewing your loan request
In addition to a history of positive cash flow (when more cash is coming in than going out), lenders are looking very closely to make sure enough money is coming into your business to cover all of your regular business expenses plus a loan payment.
Now that you know what lenders are looking for, it’s crucial to shore up your cash flow before applying for a loan. With a little foresight and regular cash flow analysis, you can make sure your cash flow is ready for scrutiny — and will give lenders the confidence they need to grant you a small business loan.
Learn from the Past
Taking stock of where your business has been is an invaluable exercise when it comes to managing your company’s cash flow. This is an opportunity to learn from mistakes, spot trends and plan accordingly.
Analyzing the numbers from past cash flow statements will allow you to quickly pinpoint shortfalls, recognize seasonal trends and identify unexpected costs along with unpaid invoices that may be affecting your cash flow for any given period.
Cash flow analysis doesn’t have to be complicated. FINSYNC’s intuitive online tools can automatically track your cash flow and help you visualize patterns with charts and other helpful graphics. These tools make it simple to tackle one of the keys to managing your cash flow: timing.
Avoid Unexpected Shortfalls
Unnecessary strains on your cash flow are often a simple matter of timing. Once you have a clear picture of past trends and patterns, you can schedule payments based on your projected cash flow to avoid crippling shortfalls.
In addition to helping you plan ahead for seasonal business fluctuations, cash flow analysis can help you identify when your customers are submitting their payments so you can adjust your outgoing payments to suppliers accordingly.
If you spot significant lag time between when you invoice your customers and when their payments are coming in, you may consider ways to get paid faster. A crucial part of cash flow management is timing your incoming and outgoing payment. This avoids dips into the red. In addition, make sure both your employees and suppliers get paid when they’re supposed to.
Plan for the Future
Cash flow projections are key to anticipating upcoming business needs and timing payments to avoid shortfalls. They also provide you with a level of visibility that allows you to avoid guesswork and make better business decisions.
Forecasting may also help you qualify for a small business loan. Showing lenders where your company is headed with the help of their funds can greatly improve their confidence in your business — and in your ability to repay the loan.
Perhaps most importantly, tracking the trajectory of your cash flow. This will allow you to capitalize on timely opportunities and plan for growth.
Stay in Business
If you’re still not convinced that managing your cash flow is worth the effort, consider this unsettling statistic. Perhaps you’ve heard about the number one reason small businesses fail? You guessed it: cash flow. A whopping 82% of businesses shutter due to cash flow problems.
Just because your business is profitable doesn’t mean you’re in the clear. An unsettling number of profitable companies fail simply because they run out of cash. When there’s more money going out of your business than coming in, you’ve got a serious problem. No matter how profitable you are on paper.
FINSYNC makes it easy to manage your cash flow, with intuitive tools that do the hard work for you. It’s just one more way that getting your finances in synch can help your business succeed.