What does the future hold for your small business finances? Positive cash flow is crucial for maintaining business operations and paying employees. If you don’t manage your finances appropriately, you risk cash shortages to pay your expenses when sales slow down. Fortunately, there’s a way to help you see ahead to prevent these issues and help your business grow. Here’s how you can predict a cash shortage and prevent it from affecting your business.
Create a Cash Flow Forecast
A cash flow forecast estimates the amounts of money going in and out of your small business during a specific period. If there is more cash going out than in, you may have difficulty fulfilling your vendors and employees’ obligations. To create a cash flow forecast, you review the income and expenses you’ve had in previous months to estimate your spending in the upcoming months. It allows you to map out when you’ll receive revenue and when you’ll have to pay vendors and employees.
Forecasting can help you predict a cash shortage with a visual representation of when incoming payments may not meet outgoing expenditures. You may find that some months are leaner than others. Building and adding to a cash reserve in months with positive cash flow can help you prevent a cash shortage from happening by making strategic adjustments beforehand. Review your cash flow statement each month to stay ahead of any potential problems. You may want to review it weekly when cash is tight to keep your business running smoothly.
Cash Shortage Causes
Identifying the potential cause for a cash shortage in your small business is crucial for maintaining efficient operations. There are several causes of cash shortages. If you’re just starting a new business, spending too much on startup costs can create a cash flow pitfall that can be hard to overcome. Not keeping an accurate track of expenses and mismanaging inventory can also lead to cash shortages. You can also prevent cash shortfalls by planning for off-seasons and prompt collections of receivables.
How to Handle a Cash Shortage
If you still find yourself in a cash shortage situation after taking preventive steps, there are things you can do to minimize the damage. You can sell off dispensable assets to raise the cash you need. Renegotiate financing with lenders before you miss any payments. Request extended payment terms with vendors on any outstanding invoices. Shorten payment terms with customers and cut unnecessary business expenses. Taking quick action will help minimize damage and get you back on track.
Cash Flow Management Solutions
Protect the financial future of your business by taking control with small business accounting services from Myrick CPA. We’ll help you keep accurate track of your finances to ensure that your business runs smoothly and efficiently. Our experienced professionals will work with you to create cash flow forecasts to prevent cash shortages from happening. We keep up with current market trends so your small business can fully prepare to achieve your goals. Get in touch today to find out more about our cash management solutions.