How to Use Cash Flow Analysis to Sustain Your Business

Posted by Factor Funding Co. on December 14, 2012

Cash flow problems are common among small businesses. Often, these issues can be avoided by doing regular cash flow analysis. The thought of performing cash flow analysis may be a little overwhelming for some business owners who are already burdened by the responsibilities for running their companies. However, cash flow analysis doesn't have to be complicated. Here are a few tips to help you get started using cash flow analysis to sustain your business.

 

1. Look at your current figures.

To begin, you'll have to get an idea where your business stands right now. To do so, take a look at your current sales numbers and compare them to the current business expenses. Be sure to include all of your company spending in the expense category, including payroll, utilities, office supplies, and repairs. If you're spending funds faster than you're earning them, you'll need to make some adjustments immediately. As a general rule, you should maintain enough funds on hand to operate your business for at least a year without making any sales. So, even if your sales are exceeding your expenses, you may need to make adjustments so that you can boost your cash reserves.

2. Perform financial projections.

After you get an idea where you currently stand, you'll need to look forward to the future. If you've only been in operation for a few months, look at your previous sales. Have they been slowly increasing? If so, you might reasonably project a similar rate of growth in the next few months. Have your sales been declining? You may see a similar pattern for a while to come. You should also account for any sudden changes such as drastic slowdown in sales or a sudden increase in operating costs.

3. Cut back on expenses.

No matter how your analysis turns out, you should consider reducing your company expenses. Try to negotiate better rates with your suppliers and utility providers. Don't overspend on technology. Make use of pre-owned equipment or supplies wherever you can. You should also rethink the matter of employee compensation for yourself and others. If you've been collecting an annual salary, it may be a good idea to suspend this for a time until you get your cash reserves to the desired level. Think about offering your employees' perks such as stock options instead of pay raises.

Cash flow analysis is a necessary part of running a successful company. Once you learn about how to master the basics of this process, you'll be able to use cash flow analysis to sustain your business.

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