If debits and credits make your head spin, do not fret. Not everyone enjoys dealing with numbers – I don’t. We started our business because we are passionate about the work we do, not looking at numbers. I wrote this article to help you get started on keeping your cash flow in check—even if accounting isn’t your thing. By tracking just a few key metrics, you can maintain financial health and focus your time on growing the business.
1. Cash Flow Projection
Think of your cash flow forecast like going out with 50% battery on your phone and have a busy day ahead. You manage your app usage, adjust brightness, or carry a power bank to ensure your phone doesn’t die before you get home. The goal is to predict your business’s cash inflows and outflows over a specific period, typically week by week. I did this daily when my business was going through a cash crunch.
A forecast gives you a clear idea of when money will come in and when expenses will go out. This allows you to anticipate any cash shortages and make plans before they become issues.
How to Do It:
- List all your expected cash inflows, such as customer payments, loans, or investment income.
- Note your expected outflows, like rent, salaries, and vendor payments.
- Subtract outflows from inflows to see your net cash position.
- Review and update your forecast every week.
2. Cash Balance
Think of your cash balance as the petrol level you have in your car before you set off for a road trip. If you only have ¼ tank that can take you for 120km and your trip is 200km, knowing your petrol level can prevent you from facing surprises like a breakdown that can cost you both time and money. At the end of every working day, login to your bank account to check your balance. It will take you less than a minute.
Knowing your business cash balance ensures you have enough cash to cover upcoming expenses. Especially since it is common for us to pay and receive money using Giro, knowing where your cash position stands daily allows you to not have to spend more time to deal with surprises.
How to do it:
If you’re planning to pay a bill on Friday but you realise on Tuesday that you will not have enough, you have a few days to move funds around or delay the payment.
3. Accounts Receivable and Payable
Managing accounts receivable (AR) and accounts payable (AP) is like balancing a see-saw. If you collect payments quickly but delay paying bills, your cash flow stays positive. Conversely, if your clients take their time to pay but you’re quick to settle bills, you could face a cash flow squeeze.
Accounts Receivable Tips
- Designate 1 team member to manage and be accountable for AR.
- Promptly issue and follow up on invoices before payment deadlines.
- Maintain a good relationship with your client's Finance team, including them in any festive gifting.
- Link sales commissions to payment collection to incentivise follow-ups.
- Offer early payment discounts to encourage faster client payments.
- Only extend credit terms upon explicit client request.
Accounts Payable Tips
- Maximize your payment terms by settling bills on the due date, not earlier.
- Continuously explore cost-effective vendor options with favorable credit terms.
- Maintain strategic yet ethical payment practices to uphold strong vendor relationships.
- After six months of reliable payment history, consider negotiating improved credit terms.
Review your AR and AP every week to make sure everything is according to plan. Adjust your strategies if you notice payment delays or upcoming large expenses.
4. Profit Margins
Tracking profit margins doesn’t have to be as intimidating as it sounds. There are two key margins you should know: gross profit margin and net profit margin.
- Gross Profit Margin: This shows how much profit you make from sales after covering the cost of goods sold (COGS). It’s a simple formula: (Revenue - COGS) / Revenue.
- Net Profit Margin: This is your profit after all expenses have been deducted. Calculate it by dividing net profit by revenue.
How to do it:
Assess these margins monthly to understand if your business model is sustainable. If your margins are shrinking, it’s a sign you may need to adjust pricing, cut costs, or find more efficient ways to operate.
5. Burn Rate (if you are unprofitable)
Your burn rate indicates how quickly you’re spending your cash reserves. This is especially important for startups or growing businesses investing heavily in marketing or product development. Monitoring it monthly gives you a reality check on how long you can sustain operations without additional income.
A high burn rate could mean trouble if sales don’t pick up or unexpected expenses arise. On the other hand, knowing your burn rate helps you plan ahead and decide when to adjust your spending or seek additional funding.
How to do it:
Subtract your end-of-month cash balance from the start-of-month balance. Divide your cash reserves by that amount to get your runway.
Cash Flow Management Doesn’t Have to Be Scary. Even if you hate accounting, managing these five metrics is doable. With simple weekly or monthly habits, you can gain clarity on your business’s financial health. It’s about working smarter, not harder, and keeping your financials organised without feeling overwhelmed. I recommend scheduling these into your calendar so nothing interferes with your cash flow management habits.