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What is cash flow monitoring?

All businesses must reduce the risk of cash flow problems. Despite all the problems that the COVID-19 pandemic has brought, even the most trustworthy customers might not be able to pay their bills on time. This guide will show you how cash flow analysis can help your business grow and meet its payments, even in uncertain times.

Cash flow monitoring or management is the process of tracking money entering your business and comparing it to outgoings like bills, salaries, and property costs. It gives you a full picture of revenue and costs, so you can make sure you have enough money to pay your bills while also making a profit.

Understanding your cash flow will allow you to predict company profits better and identify investment opportunities. No matter how much work is in your pipeline, customers who have not paid their invoices can cause a financial crisis that cannot be fixed by simply increasing revenue. It doesn’t have to be difficult to avoid cash flow problems, but it is essential to your success and survival.

calculator and ledger

Why poor cash flow monitoring is bad for small and medium businesses

Cash flow issues are something that all business owners want to avoid. Negative cash flow is often more severe for small and medium enterprises because of their small size and limited financial resources.

While a larger company may have cash on hand to cover late payments, smaller businesses are more dependent on their monthly income forecasts to meet their financial obligations. In serious cases, business owners may have to resort to personal funds to keep their business afloat.

Long-term negative cash flow is a problem for ambitious businesses that want to grow. Business owners won’t be able to invest their time and energy in thriving. Instead, they will have to struggle to keep the business afloat month after month. It’s not surprising that research found that 71% of small business owners worry about their cash flow.

Regular credit checks on your suppliers and clients are a great way to keep positive cash flow. There are various tools that will show you the business credit score of your client and highlight any potential problems early. You can also check the credit history of existing customers to determine if they are in financial trouble, which could put your business at risk.

When it’s time for you to increase your cash flow

It’s easy for people to overlook early signs of cash flow problems if they don’t have a good understanding of cash flow.

There are many signs that your company may soon face financial problems. However, they won’t become apparent until you have a budget in place, established cash flow targets, and maintained a good reporting system. What are the warning signs you should look out for?

Late or missed payments

You might be experiencing cash flow problems if you start to notice unpaid invoices starting to pile up. Even with automated reminders, it can be difficult to pay your business bills if cash is not available. Late payments or missed payments can be caused by lack of cash or poor admin. This could impact your ability to get financing, find suppliers, and create partnerships.

Your cash flow is negative

Although many business owners are careful about cash flow, sudden financial shocks such as a client leaving or machinery failing can quickly make you lose your business. It’s difficult to raise your revenue fast enough to cover your expenses once this happens. You should take every precaution possible to ensure you are ready for anything. Monitoring customers’ credit scores and monitoring your own business’ credit score is equally important. If your finances are strong, you should be able to get cash flow loans and financing for new equipment.

There are no discounts for accounts.

Many vendors offer early payment discounts, which can help protect their cash flow and give you a financial edge. You could be putting yourself in a difficult position if you pay all your accounts in full. This could cause cash flow problems.

It’s not easy to find the funds you need to pay for your expenses

You will have a positive cash flow, which will make managing your expenses easy. It will be easy to manage your costs by knowing exactly what is coming in and when. You can also set up payment terms for outgoings that won’t be missed. If your cash flow is a struggle, it’s time for you to improve it.