Accounting & Finance
7 Small Business Tips for Managing Cash Flow
Running a business isn’t easy.
If it was, then every new business would be likely to succeed. Clearly, that’s not the case. In fact, 50% of new businesses fail within 5 years of operation.
Statistics like that inevitable beg the question: why do some businesses succeed where others don’t? What separates the good from the bad?
Well, one of the leading causes of business failure is the ‘simple’ matter of cash. It turns out that of the businesses that fail, 82 percent do so because of cash flow management problems. Without a steady flow of cash, in and out of the business, failure is far more likely.
Want to avoid the same fate for your company?
Keep reading to discover 7 top tips for managing cash flow as a 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 Diligent
As we’ve already noted, staying on top of your finances is vital to success.
You must know the state of your cash flow at all times. Be diligent. By that, we mean to check your cash flow at regular intervals. Don’t just do it sporadically. Build it into your weekly, monthly, quarterly and annual routine.
Keep accurate, organized, legible accounts to refer back to. These will be invaluable as your business expands and progresses.
2. Forecast Effectively
No-one likes surprises in business.
It’s your job to anticipate potential problems before they happen. Look ahead and make projections. Calculate your earnings for given time periods and the cash you expect to have at your disposal.
Part of this is understanding your current financial standing. After all, knowing what needs to happen begins with the knowledge of where you’re at. This showcases the importance of staying on top of cash flow matters.
Look at how much money you made last month. Consider the expenses. Then, with this data at your disposal, look to the future. How much do you expect to earn and spend in the coming months? This is an important way of predicting potential problems down the line.
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.
4. Make a Quick Buck
Sometimes a cash injection can make a big difference.
One way to generate it is to sell on any assets you own and no longer need. Most businesses can find old inventory, equipment, software and so on to cash in on. There’s no point holding on to anything that’s gathering dust on the shelf. Make the most of anything with monetary value.
5. Don’t Fall Behind on Invoices
You’d be surprised how many businesses do this.
They’ve done the work, sold the product, then fail to bill the client. Days and weeks can go by without it happening!
Larger businesses are great at staying on top of this. It’s usually smaller businesses that are laxer! It’s easily done- with more work than time, administrative tasks can fall by the wayside.
It’s a recipe for disaster though. You don’t get paid until the invoice is sent. Let them stack up and large periods of time can elapse with no money coming in. Send them quickly, via email, and with clear instructions on due date and amount owed.
6. Delay Paying Your Own Invoices
Conversely, and a little cheekily, your cash flow will improve if you delay making payments.
Don’t renege on contractual obligations nor push your luck. Equally, only do this if there’s no penalty for late payments. Waiting to pay a vendor gives you a better chance of having money coming in too.
However, just as you want prompt payment from customers, so do the vendors you rely upon. Don’t risk business relationships unnecessarily.
7. Seek Upfront Payments
As we’ve seen, invoicing customers after you’ve provided the product/service can be problematic.
A better approach is to seek as much money as you can upfront. Subscription models offer a prime example. Instead of producing and shipping a magazine and then asking for payment, the customer subscribes, pays their money, and then receives it.
Likewise, a graphic designer may request a down payment. It’s a deposit that secures the job. With the plans drawn up, they might ask for another percentage to be paid. Finally, they ask the client to pay the balance upon completion of the project.
Payment upfront ensures money is always coming in.
Time to Start Managing Cash Flow Better
There you have it: everything a small business needs to know to begin 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. Hopefully, this article has provided all the information required for you to improve the state of your finances!
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