Understanding cash flow, as well as cash flow management, is highly crucial to the success of small businesses. Business cash flow basically refers to cash – or cash equivalent – that comes into or goes out of your small business. Positive small business cash flow implies that your income from clients or customers is more than the amount that goes out as expenses.
But if the amount going out of your business is much more than the amount that comes in, it is an indication that you need to improve your cash flow management significantly. Ineffective management of cash flow is one of the primary reasons behind the failure of small businesses.
Is Profit Equal to Good Cash Flow?
Before discussing efficient cash flow management, it must be stated here that profit isn’t equal to good cash flow. You can’t use profit as the basis for your cash flow since several other financial figures feed into the factoring of your cash flow. This includes:
- Accounts receivable
- Capital expenditures
- Accounts payable
Highly efficient cash flow management focuses on every driver of cash, along with loss or profit. Earning a profit is definitely not the same as knowing precisely what happened to your money.
Common Cash Flow Problems in Most Small Businesses
Most small businesses experience these common cash flow problems, which generally stem from inefficient cash flow management.
Here some of these cash flow problems that many small businesses experience:
- Not Monitoring Cash Flow Projection Appropriately
It is crucial to track incoming and outgoing cash flows, even if it is once in 30 days. But it is much better if you can do so daily or weekly. Entering everything into a central document gives you an excellent perspective of your overall cash flow.
- Growing Too Fast
Make no mistake about it: you can be a sorry victim of your own success. For instance, if your small business grows too fast, you may discover that all your cash flow is invested in upfront costs in order to meet client demand that is yet to come through.
Sticking to slow and steady growth will prevent such an occurrence in your small business.
- Wrong Pricing of Your Products
Charging too much easily scares off customers while charging too little is a considerable risk as well. This is because your customers may not value your products all that much if you price them too low and your payments will also be lower.
- Not Having Enough Cash Reserves
Always have at least 3-6 months of working capital in place. This enables you to prepare for unforeseen demands on your cash flow from an emergency that needs to be attended to urgently to a client who fails to pay up on time.
Efficient Cash Flow Management Tips for Small Businesses
Here are some efficient cash flow management tips you should consider the following:
Use Reputable Accounting Software
Monitoring cash flow doesn’t have to be time-consuming or even expensive. You can get your hands on high-quality but inexpensive accounting software like GnuCash or Wave. These are open-source options that have proven to be very useful, even in big organizations.
Always Ensure Your Cash is Working
Create an interest-bearing account in order to make your cash work tirelessly for you. This account should be your #1 cash reservoir.
Make sure you keep your cash in what is known as an ‘immediate access account. Never let the bankers talk you into locking it down into a thirty-day or sixty-day CD bond.
Spread Out Your Expenses
Making all your payments the same day can be awful for your business even if it is very easy to remember. Instead, make use of digital banking so that you can set up automatic payments.
Consider using reliable accounting software – such as Xero, etc. – to help you track cash flow across every month.
Make Sure You Always Get Paid on Time
Train your clients or customers to always pay up on time. It helps to enhance cash flow management.
Get hold of online invoicing software such as Invoice Ninja, etc. to send out automatic payment reminders. Make sure it is incredibly easy for your customers to pay you by providing numerous payment options. Make it very easy for them by including a one-click payment action.
Minimize Cash Outflow
Do you have faulty capital equipment? Fix it instead of replacing it. Look for and purchase reconditioned or used equipment that is still in excellent condition. Don’t upgrade your products until you have no choice but to do so.
Opt for high-quality open-source business software as against more expensive customized options. Consider bartering your products for adequate supplies. All these will help to save you money in the long run.
Have a Backup Plan Always
What if you need emergency cash for your small business? You don’t have to be in a fix. Make sure you set up cash flow solutions by staying abreast of your business credit score.
This will set you on excellent terms if you need to secure a business loan. The use of business credit cards may also boost your business credit standing, thereby giving you a good emergency funding source.
As a small business owner, you already know that cash is always king. But you need to learn how to build and keep an adequate stockpile of cash reserves. This provides maximum flexibility and opportunity to your business while enabling you to sleep more soundly at night.
Profits are pretty meaningless without cash. Not exercising efficient cash management could put your small business in trouble as you won’t be able to compete favorably in your niche or industry.
The tips shared above should help you manage your cash flow more efficiently so that you can soar to the next level without fail.