We’ve all heard the saying that ‘cash is king’, but cash flow is still often an area of business that gets neglected. Being able to effectively manage your cash flow is key to the long term survival of your business.
Cashflow is critical to small business. You need to be able to pay your bills, pay your team and invest in growth. Understanding your cashflow is so important so you can make the right decisions for your business.
Cashflow is not overly complicated when you break it down. It is simply an understanding of where your money is coming from, where it is going and when. It is often mistaken for being the same as profit, however, the objective of cashflow management is to understand the flow of cash in a given time period, not just the bottom line.
A good cashflow management system will include all your business incoming and outgoing payments, including revenue and all expenses, such as rent, payroll, equipment, product development and loans or investments. It can help you identify when you will have a surplus or when you are likely to fall short. Knowing this allows you to plan for the lower periods and optimize the surplus.
Some tips for managing your cashflow:
Track Cashflow
It is critical to have a cashflow management system in place. You will never know when you to adjust cashflow if you don’t know what is already going on. You need to be able track your cashflow and know which levers to pull when you need to reduce expenses or increase cash. Make cashflow forecasting a regular habit so you can keep track of money coming in and money going out regularly and act accordingly.
Increase Sales
Probably the first thing everyone thinks of when cash is low – increase your sales. The more money coming in, the better the cashflow. Many small business owners get put off by the cost of marketing to new customers, however, with modern ways to reach people, like Social Media and Email Marketing, it does not have to cost a lot of money to advertise.
Invoicing and Debtors
Make sure you stay on top of your invoicing and your debtors. Invoice in a timely manner to ensure payments are made on time. Have clear payment terms and easy ways for your customers to pay. A debt recovery process will be invaluable for those times when invoices are not paid on time to make sure you are following up on your invoices and ensuring payment.
If you are a business that requires cash on completion of projects, consider requesting deposit invoices for large jobs. If debtors are frequently late, consider an incentive to pay early or fees for late payments.
Monitor Stock
Take advantage of higher cash flow periods to modify your stock orders allowing stock to be available for lower cash flow periods. However, you also need to avoid having money tied up in slow moving stock. Practice good stock control to ensure safe levels of stock and maintain balance.
Sell Assets
Take stock of your assets and ensure nothing is obsolete or dormant. Sell any assets that are no longer used in your business and create a cash injection. This may also reduce costs on storage for equipment, machinery and tools that are not needed.
Watch Expenses
As well as increasing cash coming in to the business, you will need to look at the cash that is leaving the business. Keep your outgoing payments to a minimum and look for opportunities to save money. Streamline and reduce costs to balance the scales of your cash flow.
Reducing costs can be a challenge as many things are fixed costs, however, knowing your cashflow makes it easier to find areas where you can reduce spending.
Create some room
Build a cash reserve to get you through the lower periods. This will increase your confidence and help you prepare for unexpected costs. It will also allow to take advantage of opportunities as they arise. Setting aside some cash that could cover a few months’ worth of expenses could save the business in unpredictable circumstances.
Learn and Grow
Improving your own financial skills will help you improve your cash flow. Learn your numbers and know what they mean. Use accounting software so that you always know your financial position and can forecast your cashflow with ease.
Sharpening your financial skills will allow you to be aware of any large expenses coming up and consider big investments before making them.
Consider outsourcing some of the financial needs to an accountant so that you can feel confident in the business and it’s growth capability.
Every business needs a good cashflow management system. It is crucial to the success and growth of the business to have good flow of money. It is as simple as ensuring your income is more than your expenses, leaving you with a profit.
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