Cash flow management for small business is critical and understanding cash flow is key to success. Although, managing cash flow could be one of the toughest parts of being a small business owner, it is of utmost importance. Between ongoing operational costs, late payments and unexpected bills, it’s sometimes challenging to meet your financial commitments.
Business cash flow is basically the cash or cash equivalent that’s coming into and going out of your small business. If you have positive small business cash flow, that means the amount of cash coming in from customers and clients is more than the amount going out for expenses. If your business cash flow problems show that the amount flowing out is more than the amount coming in, it means that you need to improve your business cash management.
Here are few tips on how to improve your cash flow in small business.
How to Manage your cash flow in small business.
Know your expenses.
It’s easy to lose track of your spending if work has been hectic, but just a couple of high-cost months can put a significant dent in your cash flow. Keep on top of your expenses by knowing roughly how much you usually spend on regular bills (marketing, couriers, etc.) so that you’ll recognize an unexpectedly large charge straightaway.
You should also review operating costs like power, internet, and phone regularly to ensure you’re getting the best deal. In addition, you should also know how much you should ideally charge, the cost of your offer, and the profit margins on your product or service. You can make use of accounting software to monitor your cash flow.
Identify Business Risks & Prepare In Advance
There are many risks involved in running a business, and serious challenges should be expected at some point in the future. Although, risk can be hard to spot, however, let alone prepare for and manage. And, if you’re hit by a consequence that you hadn’t planned for, costs, time, and reputations could be on the line. Identifying risks should be done early in a project and shouldn’t be done in the middle of or during a project, as it may be too late.
After identifying the risk, you need to draw a risk management plan which allows you to attempt to prepare for the unexpected by minimizing risks and extra costs before they happen. By implementing a risk management plan and considering the various potential risks or events before they occur, you can save money and protect their future.
This is because a robust risk management plan will help your business establish procedures to avoid potential threats, minimize their impact should they occur and cope with the results. This ability to understand and control risk enables you to be more confident in their business decisions.
Create A Separate Bank Account For Your Business
A common mistake associated with running a business – especially among start-ups – is mixing business and personal bank accounts and credit cards. Open an interest-bearing business account that serves as your central cash reservoir.
Its strongly advised to have a separate bank account for your business. You can ask your bank to issue a credit card, make business-related purchases on that card and pay using your company account. Most credit cards provide management reports that detail the types of purchases made over the month and over the past year. This type of information can then be used in your cash flow budget for the next year.
Liquidate Old Inventory
Inventory is one of the largest business expenses you might encounter. You need inventory to make a profit, but you want to make sure the inventory you’re buying is actually selling. Carefully consider which products sell well and which you have a hard time turning over. Retail businesses should assess their inventory every week to identify items that are not being sold at the pace they should. Take a look at your sales patterns to see when your busy and non-busy sales times are and order inventory accordingly.
Excess inventory can quickly become obsolete and worthless as customer requirements change and new materials are introduced. Consider selling any inventory which is unlikely to be used over the next 12 months unless the costs to retain it are minimal and the proceeds from a sale would be negligible. If you have any old inventory that you’re having a hard time getting rid of, consider liquidating the items. Any money coming in is better than no money.
Get Customers To Pay On Time
One of the best ways to improve cash flow in small business management is to train your customers to pay on time. You should send your invoices as soon as possible, be clear on your payment terms and follow up on unpaid invoices as soon as they become overdue.
Late payments can put a considerable strain on your cash flow, so it’s essential that your customers understand that you have a consistent debt collection process and will take action if they haven’t paid on time. And this might sound obvious but send your invoices on time. The sooner you invoice your customers, the sooner they’ll pay.
Delay Your Payables
The later you send payment the longer your cash is available and earning interest. This keeps the cash in your account so that you can use it elsewhere to generate more cash. With digital banking, you can set up a direct debit to pay recurring expenses on the final day they are due so that you don’t risk paying late fees. However, if your vendor offers a discount for paying early, be sure to pay in the required time to save some money.
Always Have a Backup Plan.
Cash flow shortages are often difficult to predict, particularly if they’re caused by a large unexpected expense or uncharacteristically slow payment from a major customer. You should always have a plan in place to access additional capital if you need it.
At some point, you’ll need emergency cash for your business. Prepare cash flow solutions for small businesses by staying on top of your business credit score so that you’ll be able to get good terms on a business loan, even if it’s one you take at the last minute. Using a business credit card will boost your business credit standing and give you a source of emergency funding.
These tips above gives you an insight on how to manage your cash flow, hence you can now learn to benefit from adequate management of your business cash.