As the adage goes, cash is king.
By ensuring that your small business has enough cash in the bank in order to pay the bills, you can set the groundwork for success.
Cashflow is the number one reason for small business failure, but it doesn’t have to be. By monitoring two basic metrics you can stay on top of your cash situation and take the necessary action before the cash runs out.
Here are 2 quick ways to do a business checkup and take control of your cash flow.
These two ratios shows you whether you have enough cash on hand to pay your upcoming liabilities. In addition, the quick ratio will factor in your receivables and other short term assets which can be turned into cash quickly.
If both of these ratios are below 1, you are in a very tight cash situation and should contact your business advisor for help with your short term cashflow.
2 – Cash Runway
This calculation is relatively simple to perform but is very powerful for companies that are not yet creating positive net income. The cash runway shows you how much longer your cash will last for. it does this by comparing your current cash reserves against your monthly burn rate (the difference between the amount of money your company spends each month and the amount it earns)
If your cash runway drops below 6 months and you don’t think you will become “cashflow positive” in that time, you should look at financing options to extend your runway.
Let us know what your biggest pain points around cashflow management are in the comments below.
This blog post was originally published to Mentio.ca in 2015.