Cash Flow: How to Break Even

In very general terms, cash flow refers to the relationship between your assets and liabilities. If you have enough money coming in to cover your expenses, you have a positive cash flow; if your expenses are outpacing your earnings, there’s a cash flow problem that needs to be addressed.

In this first post, we’ll look at some basic tips for reaching a break-even point that will help you start working towards a positive cash flow. 

How Much Do You Need to Break Even?

With cash flow, you’re ultimately looking to turn negative to positive and have more money coming in than going out. One important first step to achieving this goal is to simply break even and keep your expenses from overpowering your intake.

So you’ll need to sit down and crunch some numbers here. Look at your accounts payable and receivable, and calculate how much money you need to be making in order to reach that break-even point. It’s a great starting place for you to then begin monitoring whether you’re going over that point or falling short of it.

If you find yourself falling behind and losing more money than you’re making, there are a couple of strategies you can use to balance things out and start reversing the tide.

Reduce Expenses

This is the most obvious way to avoid negative cash flow, but for many businesses, it’s a hard goal to achieve. There’s a tendency to fall back on credit for starting and running a business, and this can be financially harmful in the long term.

If your cash flow problems feel like they might be getting out of hand, have a look at how you’re spending your money, and find ways to reduce these expenses. Try not to order products or supplies before you absolutely need to. Clear out your current inventory. Weed out any unnecessary expenses. These things all add up in the end.

Set Invoice Terms

Another way to get negative cash flow under control is to set payment terms on invoices. Many cash flow problems lie in the accounts receivable sector of business finances, with unpaid invoices. Establish time limits for payments, and make it easy for these payments to be made. For example, look into allowing for payments in installments or offer incentives for pre-payments or early payments. In the long run, this will help even out your cash flow.

Have an Emergency Cash Reserve

Having some money stashed away is essential for any business, but even more so if you’re working towards a positive cash flow. Economic downturns or just bad business periods can sink your business ever deeper into debt, so it’s a good idea to have enough cash on hand to cover at least three to six months’ worth of expenses.

Get Help

Finally, remember that you don’t have to do this the hard way! If you’re a one-person business and do all your own accounting, make sure you invest in robust software to help you keep track of cash flow—spreadsheets aren’t going to cut it for business finances!

And, if possible, hire a professional to help you manage all those numbers and help you set a course for financial health and positive cash flow.

If you’re looking to turn the tide on your business cash flow, I’d love to talk! Simply contact me for a consultation, and let’s work together to make your business thrive.