Your business’ cash flow is vital to sustaining everything because it determines if you can pay your monthly bills, afford your daily operations, or pay for business emergencies as they arise. In other words, it tells you how much liquidity you have to work with. While this may be hard to do, it is best to keep a close watch over your cash flow, and here is why.
5 Reasons to Watch Your Cash Flow Closely
You need to know how much cash you have to work with.
It is impossible to make sound business plans without having a full understanding of the state of your business. In the same way, it is impossible to make wise spending plans without knowing how much money you have to satisfy your obligations. In fact, even your most basic budget will depend on knowing the amount of cash you have to spend, since proper budgeting requires that you prioritize obligations based on the money you have to cover them.
It helps you stick to your budget.
As a small business owner, there are few things that are worse than going over budget and having too little to meet your expenses is one. Knowing your cash flow will help you to set a realistic budget and should motivate you to stick to it in order to avoid spending unnecessarily. This is especially so if you already have less money than you need.
It increases your ability to make projections.
How much money will you have in 3 months? How about 6? While it is impossible to set an exact figure due to things such as emergencies, price increases and reduced sales, having an idea of how much cash you are likely to have in 6 months can help you see where possible pitfalls exist. You can also start planning for projected rough times.
Bookkeeping and accounting become much easier to handle.
Tracking your day-to-day expenses is much easier if you do it daily or at least more frequently than at the end of the month. This not only allows you to know how much you have, it also allows you to see exactly where it came from and how it is being spent. It also prevents you from having to sort out a month’s worth of receipts at once, thereby simplifying your bookkeeping and accounting.
It makes it easier to spot profit and loss.
Every business wants to make a profit, but there is a figure that many owners neglect to track. This figure is their breakeven point which, in short, is the point at which they start making as much as they are spending. This number is important for you to track because it tells you when you are operating at a loss and when you are making a profit. Keeping a close watch on your cash flow helps you to know this number.
These are just five reasons to practice good bookkeeping skills so you must try your best. Where you lack the ability, you should at least consider outsourcing the task to a trained bookkeeper. Speak with us to see how we can help.