Effective management of cash flow is the key to the survival of any business, especially small business owners. Statistics suggest that poor cash flow management is one of the top reasons 50% of small businesses fail during their first five years. To ensure that you aren't one of them, here are some expert tips and solutions to help you manage your cash flow efficiently.
What is cash flow?
Cashflow essentially refers to the money that moves in (as ‘income’ from customers) and out of business (as various expenses and expenditures) over a specific period. It is usually tracked over a fixed reporting period such as monthly, quarterly, or yearly. It can either be: Positive cash flow: That is when the business receives more income than what is spent as an expenditure. Negative cash flow: That is when your business expenditure surpasses the income.
6 ways small businesses can manage cash flow
There are two main strategies to improve your cash flow - increasing the incoming money and reducing the outgoing cash. However, you can try other ways of increasing your wealth:
1. Keep your personal and business finances separate
Begin by opening a different business bank account to keep your finances in order and save some serious trouble along the way. Some essential factors to consider when choosing the business account include: Account features Transaction and withdrawal fees Customer support options
2. Keep a detailed record of your finances
Just having a profit and loss account of your business isn't enough to get a good idea of your business's cash flow. You also need to keep detailed financial records that you can refer to when required. Among the things that you need to keep track of include: A complete track of how many invoices are being processed How much cash is already in circulation? What are the bills that need to be paid?
3. Prepare a cash flow statement and forecast
One of the best ways to keep a close check on the cash flow is to prepare a detailed cash flow statement and forecast. It is a simple financial document that will give you a complete snapshot of your actual flow of cash, along with monthly forecasts.
4. Know how much is required to break-even
To ensure a positive cash flow, you should know how much your business needs to earn before it breaks even. The simple rule of thumb is that you’re doing something right if you go over the break-even point. If you consistently fall short of it, you need to work upon a few areas.
5. Set your invoice timelines and terms carefully
To effectively manage your small business' cash flow situation, you must set your invoice timelines and choose appropriate payment terms. If your business is selling directly to the customers, it makes sense to collect the payment immediately. But for companies that sell to other companies, it is better to offer credit in payment terms (15, 30, or 60 days). This attracts new business and builds trust among clients, although with a direct impact on your cash flow.
6. Reduce your expenses
While bringing in more money is always considered a good cash flow management strategy, delaying or reducing your costs can achieve similar results in a different way. Some of the directions to do this include: If there are upcoming payments, see if you can get an extension. Hire part-time workers to fill in your staffing gaps. Cut down on storage costs of unused equipment. Find other ways to increase your profit margins, such as cheaper suppliers and higher prices.
The Bottom Line
Smooth financial management is necessary to define the success of any small business. The best approach is to manage your cash flow wisely, plan and review everything frequently and thoroughly, and consult an expert whenever in doubt. While all of these strategies might not work for every business, it is best to choose the one that makes the most sense for you. This allows you to navigate your financial position like a pro and become a profitable business in no time. For more insights on how small businesses can manage their cash flow better and take business loans when required, visit Onthewaymoney.com today.