Poor cash flow management is one of the leading causes of small business failure. Money is fast going out but slow coming in, particularly for new businesses that are still building their customer base. Having a monthly budget is a first step to understanding your cash needs but you can go one step further with a daily cash flow projection.
This report uses your starting bank balance for the month and adds your anticipated bills and invoices to determine your working cash balance on a daily basis. If things are tight, knowing whether you will have enough receivables in by the date your rent is due can save you a bounced check.
You should be reviewing and updating this report throughout the month. Checking the report regularly against your paid bills will alert you quickly to anything that is past due and give you a heads up for potential low cash events.
If your business is repeatedly low on cash throughout the month, it is worth investigating the supplemental reports available in your accounting system. A collections report will show you the average number of days it takes for you to collect cash from an issued invoice. Speed up those collections and that will provide you with more working capital during the month.
Xero has a great Aged Receivables report that you can drill into for details. It can even be converted into chart form for those that prefer visuals:
On the flip side, an inventory turnover report will show you the average number of days you are holding inventory before it is sold. Inventory ties up valuable working capital. You want to keep your product on your shelves for as little time as possible. Analysing sales trends on a monthly and annual basis can help highlight changing inventory needs so you don’t over buy in the future.