Cash Flow Planning For Solo Professionals by Kristine McKinley in Finances at Isnare
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So what is cash flow planning? Cash flow planning is projecting your future cash inflows from sales, services, and loans, and comparing them to your future cash flow needs (suppliers, salaries/wages, loan payments, taxes, etc.). The difference between the two is your net cash flow.
Why is cash flow planning so important? Cash flow planning can help you identify problems down the road, and fix them before they occur. So, you should track both your personal and your business spending, although I recommend that you keep them separate (that a topic all by itself).
What the best way to track your spending? You can use pen paper, spreadsheets or a software program. The best method for you is the method that you will actually use on a regular basis.
You should project your spending for at least the next 12 months so that you include annual and other periodic expenses. If you are experiencing a cash flow crisis, you should track project your cash flow on a weekly basis, instead of monthly.
If you are an existing business, you can project your cash flow for the next year by reviewing your expenses for last year. If you are a new business, you will need to estimate your start up costs in addition to regular operating expenses.
Start up costs include inventory, legal expenses, advertising, licenses permits, supplies, and many more costs that you may not have thought of. To research startup costs you should contact your local Small Business Development Center, contact a SCORE counselor, join groups of similar business owners, and read as many books or articles you can find on the subject.
To improve your cash flow, you should:
1. Complete the first 3 steps. You have to understand cash flow planning, track your cash flow, and project your future spending needs before you can improve your cash flow.
2. Create best and worst case scenarios and create appropriate responses to both scenarios. For example, if your best case scenario is to increase sales by 50%, how will you use the profits? Will you put the profits back into the company by investing in new equipment, training, etc.? If your worst case scenario is a drop in sales by 50%, how will you continue to cover your monthly expenses? By planning for the best and worst case scenarios, you be ready for any situation.
3. When estimating your future income, realize that some people will pay late, and account for that fact in your projection.
4. Charge what you worth. Many businesses, especially service professionals, under charge when they are first starting out. This is a great way to go out of business. Make sure you are charging what you worth, and remember you in business to make money, not to give your expertise away for free.
5. Watch your business spending.
6. Don hire until necessary. Consider using virtual assistants or temporary employees before hiring permanent employees.
7. Give incentives for early payment for products and services. On the flip side, chase down invoices the minute they late. Charge interest or late fees to encourage timely payments.
8. Update your cash flow regularly. Your cash flow plan will change frequently as your business grows. You may want to update your cash flow plan weekly when you first get started, then switch to monthly once you got a good handle on your cash flow.
Remember whether you are a new or growing business, your cash flow projection can make the difference between success and failure. The article is strictly for educational or entertainment purposes only and should not be used in any way, implemented or applied without consultation from a professional. Please read our Terms of Service for more information.
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