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7 Small Business Tips for Managing Cash Flow

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managing business cash flow

Managing business cash flow effectively can be the difference between success and failure. It should be simple to do yet, 50% of new businesses fail within 5 years of operation.

Statistics like that suggest not every business owner has their finger on the cash flow pulse! Most reasons for failure begin and end with poor cash flow management. Without a steady flow of cash, in and out of the business, failure is far more likely.

This article has seven top tips for managing cash flow in your startup or small business.

What Is Cash Flow?

But first, let’s consider a definition of cash flow itself.

In simple terms, your cash flow is the state of your finances in terms of earnings and expenses. It’s an accurate look at the money flowing in and out of your accounts in a certain timeframe. Knowing your cash flow enables you to gauge the financial health of the business.

It’s vital to success. Indeed, cash flow is often referred to as the ‘life-blood’ of a business. Keeping constant tabs on it ensures expenses never outweigh income. And doing that means you have a better chance of staying cash positive.

Top Tips for Managing Cash Flow

With a definition behind us, it’s time to move on. If you’d like further info by the end of this piece, then you can find out more by clicking that link. For now, here are 7 key cash flow best practice tips for your small business.

1. Be disciplined and financially competent

Avoid putting off financial education. Do an online financial management course so you know how to read a financial statement.

Create a comprehensive cash flow forecast that outlines your expected income and expenses over a specific period (e.g., monthly or quarterly).

For any forecast to work for your business, you need to check in with it regularly. Diligently update and revise your forecast based on actual performance. Never fudge the numbers as the only person you will end up fooling is yourself! Your update and check-in schedule can be as regular as weekly, and also monthly, quarterly and annually too.

To ensure your business is staying it’s course, engage an external expert like an accountant to check your cash flow forecast every quarter or more regularly if your business requires a change of strategy to improve cash flow management.

2. Establish a cash reserve

No-one likes surprises in business. While you can predict and make projections about your earnings, expenses and profit, there will be times where there is a shortfall of funds.

Create a plan on how to build up a cash reserve to cover unexpected expenses or to bridge gaps in cash flow during lean periods. Aim to have at least three to six months’ worth of operating expenses in reserve.

3. Spend less

You have to spend money to make money, right?

However, for businesses to remain successful over time, they absolutely must generate more money than they spend. Now, growth requires expenditure. But there’s great danger in failing to track it.

Strange as it seems, businesses can have their best sales year to date, and end up with no money in the bank. For example, clients may take time to pay their invoices. The whole time, a business is paying out for utilities, salaries, office space and so on. The money is always going out, but it’s taking time to come in.

With no cash in the bank, trouble is on the horizon! That’s why cutting costs is so fundamental to success. Be rigorous in your efforts to cut unnecessary expenses.

Regularly review your expenses and identify areas where you can cut costs without affecting the quality of your products or services. Prioritize spending on essential items.

4. Quick cash injection

Sometimes a cash injection can make a big difference. Diversify your sources of income to reduce dependence on a single customer or market.

Explore new products or services that complement your existing offerings. Plus consider a clean-out of old inventory, equipment, software and so on to cash in on. Make the most of anything with monetary value.

5. Don’t fall behind on invoicing

You’d be surprised how many small businesses cut costs by letting go of their bookkeeper. Without someone focusing on debtors and creditors even small businesses quickly fall behind. While all the focus is on selling and delivery, invoices must be raised and paid. Avoid letting days and weeks can go by without it happening!

Larger businesses are great at staying on top of their finances. It’s a recipe for disaster though. To survive hire a third party provider to manage your bookkeeping and look forward to healthy cash flow management.

6. Negotiate payment terms

Negotiate favorable payment terms with suppliers, and try to extend payment terms if possible. Regularly review all supplier agreements and itemise your savings and terms for the next round of negotiations.

You maybe tempted to delay paying your creditors within the payment terms, however this is not advised.

Don’t renege on contractual obligations or fail to pay your creditors on time. Understand the penalities for late payment.

Just as you want prompt payment from customers, so do the vendors you rely upon. Don’t risk business relationships unnecessarily.

7. Seek early payments

Encourage early payments from customers by offering discounts or other incentives.

Subscription models offer a prime example of how to manage cash flow. Consider a subscription model for your business.

Another way to get early payment is with the Buy Now Pay Later services. With all payments made online, the BNPL model has proven successful for businesses and customers.

Time to Start Managing Cash Flow Better

Cash flow is a vital component in the success of a business. Failure to stay on top of it is a recipe for disaster. Some additional ways to stay on top of your cash flow management include:

  • Controlling inventory levels: Manage your inventory efficiently to avoid overstocking, which ties up cash, or stockouts that can lead to lost sales.
  • Managing debt: If you have loans, carefully manage your debt and ensure that repayments are structured in a way that aligns with your cash flow.
    Consider refinancing or renegotiating loan terms if it helps improve cash flow.
  • Tax obligations: Take advantage of any tax incentives or deductions that may be available to your business.

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