cashflow bookkeeping

The Importance of a Cash Flow Management Plan

Managing Cash is the Key to Business Survival

Cash flow is the area that can make or break your business. Do you have an effective cash flow management plan in place?

This is the age of the small business entrepreneur. In the modern era of remote offices and online businesses, there are fewer barriers to entry and lower start up costs than ever before for those of an entrepreneurial spirit who want to set up on their own.

Inevitably, with new start ups getting off the ground every day, it makes for a highly competitive and crowded marketplace. Many find to their cost that starting their business might be easy, but keeping it afloat and making it viable to thrive in the long term is another matter.

There are numerous statistics flying around the internet on how many new start ups fail within the first year or two, with some saying the survival rate after two years is as low as 15 percent. One thing that is in no doubt, however, is that when they fail, they typically do so not because there is anything inherently wrong with the product or service. It is simply a case of them failing to manage their cashflow properly.

Running out of cash

The problem for new business owners is that they are often so focussed on developing their business, winning new clients and so on, that seemingly boring and mundane topics like bookkeeping take a back seat. The trouble is, however, that regardless of how innovative your offering, and even if customers are queueing up at the door and your order book is full, if you run out of cash it can be the end of the road.

According to a study by Jessie Hagen of US Bank, a remarkable 82 percent of business failures are due to cash flow mismanagement. If you have been guilty of assuming the cash will take care of itself, perhaps now is the time to develop a cash flow management plan, before you become just another statistic.

Developing a plan

There are a number of approaches to developing a cash flow management plan, and it makes sense to set aside a little time to chat with your accountant to work out which one works best for you and your business.

Most people opt to use a fairly basic spreadsheet to keep track of the cash position and stay aware of what is coming in and going out, while others find that it makes more sense to implement multiple bank accounts for different purposes. This can be likened to placing money in a number of envelopes to allocate it to different household expenses, and many business owners find this a more intuitive method to adopt.

The point is that the key to successful cash flow management is to get into good habits, and devising a method that is simple, intuitive and effective means the business owner will stick with it.

And that can only be good news when it comes to helping your business stay in that 15 percent that go on to enjoy long term success and profitability.

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