Running a business is challenging due to the sheer amount of things you need to keep track of. One of the biggest being your cash flow.
A good cash flow makes a difference between success and failure for your business, so keeping a keen eye on the money in your business is something you should never ignore.
If you want to improve your chances of success by making better-informed business decisions and keeping your operation healthy, making adjustments to your finances is a great first step.
This article will break down all you have to know about cash flow and help you become a pro at managing your money.
What is cash flow?
Cash flow represents the funds that are going in and out of your business. Naturally, a positive cash flow signifies that there is more money coming in than going out.
By analyzing it, you can see how much money your business actually has after covering different expenses. Cash flow is usually analyzed using a cash flow statement, which is a financial statement that reports on your incoming and outgoing cash over a period of time.
Now, you may be wondering: does it matter if the profit in my business is already high?
It does. Even if you’re operating at a profit but you’ve got a low cash flow, you can still experience a hefty amount of problems, such as blindly ordering an excessive amount of stock or overspending.
This is especially important for small, growing businesses since they’ve got to keep track of every dollar if they want to cover the extra expenses like hiring new employees.
Why is it important to manage cash flow for a small business?
Managing cash flow isn’t just about avoiding cash shortages. You can also reap these major benefits that will help you future-proof your small business:
- Gain insight into where your money is going through an understanding of where you’re currently spending the most of it. This will help you identify areas where you can reduce expenses.
- Making better plans and decisions is significantly easier once you know exactly how much money is accessible at any given time. Being aware of this is crucial because any business decision should be supported by data, which will allow you to avoid critical mistakes in the future.
- It’s easy to recognize the right (and wrong) time to expand your business as you’ll have the right amount of money to support growth properly.
- It will protect your business relationships. Any dip in your cash flow can make it challenging to pay your suppliers, which can potentially hurt your reputation and relationships with your business partners. Managing money properly will ensure you don’t get bombarded with bills that you can’t pay.
6 ways to manage the cash flow in your business
It’s time to get practical. Here’s what you can do to raise your cash flow game:
1. Collect cash up-front
Let’s say you make a major sale. It doesn’t mean you’ll be rolling in dough, especially if you accept long-term payments. It only means you might have a harder time managing your cash flow.
What you can do to remedy this is to encourage larger down payments. For instance, you could offer a discount for a larger initial payment. Thus, customers are more likely to pay you up-front for your services.
2. Improve your inventory management
For small businesses that have an inventory of sorts, improving its management is a great way to improve the cash flow itself.
Holding more inventory than what’s necessary to meet demand will make you spend your available money to pay for the surplus inventory. This means you will turn your available cash into non-cash assets.
The best thing you can do to remedy this is to always turn your inventory faster. Making multiple smaller inventory turns will help you decrease the amount of cash you have in non-cash assets.
As a result, you will have more available cash you can use to cover your other expenses.
3. Incentivize paying on time for customers
Payments that are routinely late have the potential to wreak havoc on your cash cycle. If you’re constantly late in paying debts off to your vendors and suppliers, you can destroy the reputation of your business.
That’s why you need to put more effort into encouraging your customers to pay you sooner.
You can offer discounts for early payments. This way, you’ll increase the chances of your customers paying on time. You can also write in late payment terms into your contracts. If there are repercussions for being late for payments, customers are more likely to pay you sooner.
Make sure to set up automatic emails that remind customers that the payment is due several days before the deadline. If you still don’t receive your payment on time, you can follow up with another email or better yet, a phone call.
4. Negotiate with vendors and suppliers
Always try to renegotiate if it means you’ll improve your cash flow. Same as you can ask your customers if they can pay you earlier, you can also come to more favorable terms with your vendors and suppliers.
This is where your previous reputation comes in. If paying on time will leave you struggling, or you know you’ll need additional time to sell the product, ask your supplier if you can pay after the deadline.
If you’ve proven to be dependable in the past, they might give you some necessary leeway or even be willing to negotiate costs, freeing up more of your cash.
5. Update your books regularly
Never let your books get out of control. Once you update your balance sheet, you’ll have no problem keeping track of how your business is performing.
If your books have all the up-to-date info such as last month’s cash inflow, your current balance, and future cash losses, you can make optimal decisions for your business.
If you tidy your books, you’ll make it easier for yourself to figure out what to do next if your balance is low for the month, for example. You can collect payments earlier or contact your supplier and ask them to extend your deadline.
6. Use an invoicing software
If there’s something that will make your life easier and improve your cash flow, it’s invoicing software. We already stressed how important it is for your clients to pay on time – invoicing software will help you achieve it a lot easier.
Solutions like vcita’s invoicing software let you generate and manage invoices easily, as well as save time by setting up automated recurring payment reminders and invoices for your clients and customers.
What took serious staff and hours to do in the past can now be done in under a minute from a single dashboard.
Cash is king
The bottom line is that you can avoid most cash flow issues if you acquire enough insight into your costs and expenses.
Some months will not be as strong as you expect. That’s just the nature of business, but a positive cash flow and good management can help you minimize any long-term damage that might occur.
Good business practices and using technology will help you navigate the treacherous waters of the business world. With just a bit of effort and precautions, you’ll have no problems managing your cash flow – something your business partners and your employees will appreciate.