Importance Of Cash Flow Planning

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You've heard it a million times - cash can make or break a business. Lack of cash flow planning is the reason why many businesses fail. In fact, many PROFITABLE businesses fail because of cash flow issues. Without adequate cash, you can't pay your bills and you can't make plans for your business.

So... what is cash flow planning? Cash flow planning is projecting your future cash inflows from sales, services, and loans, and comparing them to your future cash needs (suppliers, salaries/wages, loan payments, taxes, etc.). The difference between the two is your net cash flow.

Why is cash flow planning so important? Cash flow planning can help you identify problems down the road, and fix them before they occur. It can also help you make decisions such as should I attend that conference I've wanted to attend, should I buy the new computer I've been wanting, or do I need to work extra hard this month to avoid a cash deficiency next month?
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Solo entrepreneurs need to have a good grip on both their personal and business spending, as most solo entrepreneurs rely on their business income to meet personal finance goals (i.e., pay the bills!). So, you should track both your personal and your business spending, although I recommend that you keep them separate (that's a topic all by itself).

What's the best way to track your spending? You can use pen & paper, spreadsheets or a software program. The best method for you is the method that you will actually use on a regular basis.

You should project your spending for at least the next 12 months so that you include annual and other periodic expenses. If you are experiencing a cash flow crisis, you should track & project your cash flow on a weekly basis, instead of
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