Cash flow is the amount of money coming in and out of your business. Cash usually comes from selling your goods and/or services. The cash is used to maintain business activities, like paying for materials to make your products, employee wages, rent and other operating expenses.
Cash flow is the main indicator that your business is doing well. That is why many business owners aim to have a consistent positive inflow of cash.
But how do you achieve that?
How do you get more cash coming into your business?
If you are starting a business or thinking of ways to grow your existing one, here are some cash flow goals that you need to achieve to keep money coming into your business.
Tip No. 1 - Have cash reserves
No matter how good your cash flow is, don't forget to have a cash reserve for your business. Save at least enough cash that would cover 90 days' worth of your business expenses to cover any unexpected events like natural disasters, market fluctuations, poor economy, illness, and more.
Having enough reserve funds will help you be more prepared for any unexpected situation and expenses.
Tip No. 2 - Avoid debt as much as possible
Debts are not good for your cash flow. If you have debt, make it a priority to pay it back as soon as you can. Remember that it is good to start with a clean slate. So as much as possible, avoid acquiring unnecessary debts. If unavoidable, make sure that paying that debt is your number one priority.
If you operate with cash and not with debt, your business will be in a more stable and stronger financial position.
Tip No. 3 - Set a margin for your cash flow
You want cash to continuously come in. But you need to make it stable by hitting a specific and realistic target margin.
Know the difference between gross and net margins. Gross margin is the amount you get before you make deductions, while net margin is what is left after you've paid all your expenses.
Your net margin should be above 10 percent to have a healthy cash flow. If it is below that margin, then you need to reassess the status of your business and identify where you are falling short.
Setting a target margin for your cash flow should be included in your business planning process.
Tip No. 4 - Pay yourself
You've worked hard for your business just like an ordinary employee. You deserve to be paid a fair share of what your business has earned. Pay yourself a reasonable wage. You deserve it. And don't underpay yourself. This can affect your personal finances. Also, if you can't pay yourself enough, it only means that you are not confident in the ability of your business to make a profit. It also suggests that your business is not financially healthy.
Tip No. 5 - Aim for capital investments
This is a clear sign of business growth. If you have a good cash flow, you will be able to save enough for capital investments and/or expansion, so always aim for this. This shows that your business is in a good financial position and that you are using your cash effectively. This is also good if you have long-term plans for your business.
Goal setting is very important in business. You need to have goals that you pursue so you know what to do and aim for. Also, your goal should be realistic. The above tips on cash flow goal setting can help you to plan for the growth of your business. Depending on your business strategy, you may identify from the above tips which to prioritise.
At Paul Martin Chartered Accountant we can assist you establish good cash flow management practices.
We are an accounting firm in Auckland that provides accountancy, and business strategy and consultancy services to small and medium businesses around New Zealand. We offer accounting services such as tax returns, annual accounts, GST and more.
We also use the best small business accounting software in NZ like Xero and MYOB to provide you with accurate and timely financial reports.
If you want to know more about us and our team of experienced tax accountants, feel free to arrange an appointment online or call us at (09) 576 4166.