If you’re a small business owner, effectively managing cash flow is an essential component to your survival. The first year is critical for any startup and if you don’t keep a track of your cash flow, your business could cease operations before it breaks even.
Most small business owners prioritize sales and marketing. While that is important to grow profits, equal focus should be directed at cash flow management. Before it’s too late, prioritizing the tracking of every penny going out and coming into your company. Here are some tips to managing your small business cash flow, better!
Basics of cash flow management
Keeping tabs on the movement of capital in and out of a company is called cash flow management. There are two types:
- Positive cash flow: When the cash coming into your company (accounts receivable, sales) is greater than cash leaving it (employee salaries, monthly expenses, accounts payable), it’s known as positive cash flow.
- Negative cash flow: When the incoming cash is less than the outflow of cash, this situation is called a negative cash flow. This is where the trouble starts brewing – but fear not, it’s nothing that can’t be fixed with timely action. We’ll dive into the strategies later.
Cashflow vs Profit
A profit and loss statement does not give you an accurate picture of your cash flow. Revenue minus expenses equal profit, but that’s not enough to tell the full story of where your cash is going.
You need to take several financial figures into account such as taxation, capital expenditures, accounts payable, inventory, and accounts receivable for smart business cash flow management.
Small business owners must have a laser focus on these cash drivers and monitor the movement precisely.
Why Fix Your Business’s Cash Flow Management?
Having a firm grip on cash flow management is not only crucial for survival, but also success in your field. Begin by figuring out your break-even point. Though it does not affect your cash flow, it will help you project the future cash flow.
Negative profits and negative cash flow don’t make a healthy combination. With a goal to strive for, you will have a greater focus on achieving the target.
Tips for Cash Flow Risk Management
Effective small business cash flow management ensures success in the long run. Now that you’re familiar with the basics, here are five important tips to help you monitor the cash flow carefully, to help increase your chance of long-term success as a small business:
1. Create a Cash Reserve
Despite how careful you are or how successful your product/service is, there may be times of cash shortfalls due to inevitable external circumstances (like the pandemic, or the recession that it spurred.)
Clients may delay the payment, or in some cases, fail to pay. Your bills may come sooner than expected. Whatever the case may be, this cash reserve would cover unexpected expenses.
Even when there’s no emergency, this cash reserve would take some stress off you for a few months.
2. Establish a Line of Credit
Even with a cash reserve, it may be challenging to maintain a steady cash flow due to a particularly unfavorable month of receiving payments, loss/theft of inventory, equipment failure, etc.
During such events, setting up a line of credit will allow you to cover critical expenses by having easy access to a bank loan. When you finally receive your account receivables, you can use that money to pay them back to limit a build-up of interest charges.
3. Negotiate Good Terms with Vendors
Try negotiating with vendors who are liberal with their payment terms. This could take some pressure off your business, especially if you’re in the midst of fine-tuning your cash flow management processes.
See if you can get some leeway with the outflows. Hence, when your receivables come later than expected, it would allow you some breathing space.
Do your best to set good terms with both clients and vendors so that everything runs smoothly. On the other hand, the stricter the payment terms are for customers, the better for your cash flow.
4. Micromanage the Process
No matter the quality of your product or services, your business won’t operate without payments. Create a well-oiled process of collecting payments, invoicing, and pricing.
It’s best not to provide too much latitude when it comes to payments. You can also consider requiring a down payment to expedite the process.
5. Let Technology Do the Heavy Lifting
Gone are the days of using an old ledger book to manage the flow of cash. Technology has made cash flow risk management easier than ever.
You can leverage accounting software to track your incoming and outgoing cash, and just download the spreadsheet when needed. Ask around to other small business owners within your network for recommendations on user-friendly accounting platforms that offer the level of support that you’re looking for.
If you follow the aforementioned strategies, you will be less likely to encounter a situation where you aren’t able to pay your suppliers or employees, which would put the reputation and success of your business at risk. Maintain a sufficient working capital that gets you through a cash crunch, and allows you continue your operations and grow your business!
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