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There are few things more important to your business than cash flow. With a healthy cash flow, you can pay your debts on time, sustain your operations and expand your business. Without it, you’re only a few missteps away from financial ruin.
Cash flow management is a set of practices and strategies to help you track, analyse and improve the financials of your business. The goal of cash flow management is to get you in the “green,” also known as positive cash flow, where you have more money coming in than going out.
Successful financial management involves balancing three elements: accounts receivable (what you are owed by the customer), accounts payable (what you owe to suppliers) and shortfalls (the amount of money you owe that exceeds your available funds).
There are two main strategies that improve your cash flow: increasing the amount of incoming money and reducing the amount of outgoing money. Some business owners, when they have financial problems, resort to using a credit card or opening a line of credit – and you don’t need us to tell you what a bad idea that is! Here are other ways small businesses can promote a healthier financial situation.
In this guide, you’ll learn what good cash flow management looks like, and we’ll let you in on our favourite strategies to get you back in the black.
Before you can work towards a positive cash flow, you need to know how much you need to earn to simply break even. If you go over the break-even point, you’re doing something right. If you fall short of it (consistently), then there’s an issue that needs addressing.
It’s imperative to establish very clear payment terms, in writing, before taking on a new client or supplier. Make sure to lay out when payments for invoices are expected, whether it’s immediately upon invoice or within 15, 30 or 60 days.
For particularly resource-heavy projects, we recommend that you ask for an initial deposit so that you have some cash to cover necessary expenses. Then, ask for the rest of the payment upon reaching certain milestones or deliverables.
An IOU from a client is virtually the same as not having money. Encourage your customers to pay early – which will benefit you financially – by offering special deals or discounts if they pay ahead of time.
Most people think that the secret to entrepreneurial success is profit, profit, profit. But actually, it’s all about how you manage your cash flow. Always check your earnings against your break-even point. If you’re earning more than that yet money still feels tight, you probably have an issue with your accounts payable, accounts receivable or shortfalls.
Keeping track of your cash flow is an important part of owning a business, but it shouldn’t be the only thing you focus on. Get a trusted employee (or your accountant) to take care of cash flow monitoring for you – just make sure that you’re always up to date with the numbers, especially if you’re going way over or under your break-even point.
Promotions are a great way to boost sales quickly and effectively. You could run a contest, start a customer loyalty and referral program, or drum up publicity through strategic social media posting.
You can also use incentives to control the influx of work. If you are getting more customers than you can handle, you don’t have to turn down jobs – offer a discount if the client is willing to postpone the work. Not only does this help you juggle multiple projects without straining your resources, but it also guarantees that you’ll have a steady stream of cash in the coming months.
Clearing out your inventory can really help kick-start healthy cash flow. Try to employ discount sales and planned promotions to move products as fast as possible.
If you have upcoming payments, see if you can negotiate for an extension. Delay for as long as possible, but even just a few weeks or even days can significantly impact your cash flow. If you can’t afford full-time employees, hire part-time workers to fill in your staffing gaps. If you have unused equipment, cut down on storage costs (and bring in some extra cash) by renting or leasing out equipment. Find other ways to increase your profit margins – cheaper suppliers and higher prices are both good places to start.
Clearing out your inventory can really help kick-start healthy cash flow. Try to employ discount sales and planned promotions to move products as fast as possible.
Not all of these strategies will work for every business, so choose the one that makes the most sense for your brand. And don’t be scared to combine multiple approaches – whatever it takes to get your cash flow up to speed. Do it successfully, and your company may be able to survive and thrive even in times of financial instability.
For more tips, read the full story here.
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