Very few things in business are as important as a steady flow of capital. Even profitable organisations can experience cash flow issues if payables (bills and debts) are due before collecting receivables (revenue from sales). This can result in significant problems, such as failing to make payroll on time. To help your small business succeed, we discuss the ins and outs of business finances, ways to improve cash flow and how to remain financially organised.
Managing Cash Flow – What Does It All Mean?
Cash flow management is a set of principles to help businesses track, analyse and improve their finances. Effective management is particularly useful to ensure small businesses reach positive cash flow, whereby they have more money coming in than they have going out. In turn, this helps organisations remain afloat, encouraging business growth and expansion whilst predicting cash shortages and surpluses in the future.
Successful cash flow management is all about balancing three things:
1. Accounts receivable: money you are owed from customers
2. Accounts payable: money you owe to suppliers
3. Shortfalls: the amount of money you owe which exceeds your business’s available funds
Benefits of Cash Flow Management
The most important benefit of cash flow management is that your business is better prepared to handle unexpected outgoings effectively. For instance, imagine your small business is fined; without cash flow management, you may have to cancel orders because you can no longer afford stock, or worse, you’re forced to lay off employees because you can longer afford their wages. Efficient cash flow reserves provide a financial cushion to tackle these unprecedented setbacks.
Nine Ways to Improve Cash Flow
Generally speaking, to improve your cash flow, you need to increase the amount of revenue and reduce the amount of expenditure. However, that’s easier said than done when you lack the relevant knowledge and expertise. Emerging businesses can take advantage of the following nine methods designed to help you promote a healthier financial situation:
1. Monitor cash flow
Effectively monitoring cash flow is an essential aspect of running a business. However, this can be a time consuming and difficult process if you’re not experienced.
Small business owners can struggle when larger opportunities arise, unable to take advantage of them as they lack the required cash. For instance, it can be tricky to understand whether you have the correct capital needed for a large order and the extra inventory that comes along with it. However, small business accountants in Nottingham, such as Nottingham Accountancy, can provide the perfect solution. Our team of professionals will keep your books up to date and give clear financial insight into your business. So rather than wasting your precious time on the logistics of your finances, you can focus on enhancing your small organisation.
2. Understand your break-even
Before small business owners can achieve a positive cash flow, they must first understand how much they need to break even. If a business is consistently falling short of its break-even number, there is a deeper issue that needs to be addressed as soon as possible.
3. Cash flow over profit
Contrary to popular belief, managing your cash flow effectively is more likely to elicit success than profit alone. Check your revenue against your break-even point. If you are earning more than this point, yet money is still tight, it’s likely there is a deeper issue with accounts payable, accounts receivable or shortfalls. Possible ways to improve cash flow include monitoring how efficiently your business is running, investigating business operations and cutting unnecessary expenses.
4. Increase pricing appropriately
Increasing the prices of your products can be a scary prospect as there is a fine line between keeping your prices competitive and asking for fair compensation. Therefore, it’s crucial to monitor the market trends and adjust your prices accordingly. Failure to do so could harm your cash flow as you may forget to include the rising costs of suppliers in your pricing model and sell yourself short. We recommend experimenting with your prices often to discover the perfect number customers are willing to pay.
5. Invoice timelines and terms
Before taking on any clients or suppliers, getting your invoicing right is crucial. You should have clear payment terms in writing, outlining the final amount due, where it is payable to the expected date of payment. For larger projects, we recommend taking an initial deposit of 10% to 50% of the total invoice to cover any early expenses. Promptly deliver your invoices to clients and encourage them to pay for your product/service in a timely manner. It may even be beneficial to offer deals or discounts to customers if they pay ahead of time.
6. Emergency cash reserves
All businesses, big or small, should have an emergency cash reserve. This will provide some security and flexibility during difficult economic periods. If possible, keep a cash reserve large enough to cover three to six months’ worth of expenses.
7. When necessary, delay expenses
If you have upcoming expenses which you’re struggling to pay, consider asking for an extension. Delay the payment for as long as possible, whether that be a day or a few weeks, as this is one of the many ways to improve cash flow.
8. Inventory checks
Businesses should take regular inventory checks by making a list of goods that don’t seem to sell at the usual pace of their other products/services. These assets can tie up much-needed cash and, as a result, harm cash flow. Instead, get rid of static stock using discounted prices to make room for the most popular items.
9. Promotions drive sales
One of the best ways to improve cash flow is to drive more sales. Promotions are an ingenious method to encourage sales and clear out old inventory. Consider employee discount sales, social media contests for free products/services or customer loyalty referral programs.
If you find you’re acquiring more work than you can handle, why now offer a discount to postpone the project until a later date when you can manage it effectively. This helps to juggle multiple ventures and maintain a steady income stream without straining resources.
Ways to Improve Cash Flow – The Bottom Line
Not all of our ways to improve cash flow will apply to every small business. Therefore, you should only implement those that are relevant to your organisation. It’s best to combine multiple approaches to truly improve your cash flow. Alongside cash flow monitoring, you should also ensure your customer service, marketing, and business operations are in check too. It’s critical to review and update your business plan regularly to ensure you can anticipate challenges before they have a negative impact, helping your business to survive and thrive even during periods of financial uncertainty.