Top 5 Methods For Effective Cashflow Management
Welcome to entrepreneurship! If you’re a small business owner, you’ve probably been learning a lot about the ins and outs of business finance. Hopefully you’re doing well managing expenses versus revenue and understand some of the basics of Business 101. But what about your cash flow, specifically?
What is managing cash flow and why is it important in the broader context of business finance? Well, to begin with, poor cash flow management is to blame for 82 percent of small business finance failure. Having a firm understanding of cash flow for small business is crucial for staying afloat, especially in your early years of business ownership.
As a business that provides resources for small business owners, we’ve learned a lot about effective small business cash flow management, and what not to do too! Here are our top 5 tips for staying on top of your revenue, investments, and the future of your business.
First, What Is Cash Flow?
Cash flow in a business describes mostly that: liquid assets in versus liquid assets out, in consideration with a number of other financial data for the given period. While few businesses work primarily with physical cash anymore, you can still consider it that: the influx of currency versus the outflux.
Cash flow might sound a lot like other related, but different metrics of small business finance. For example, you might be thinking now that cash flow is just a way to describe revenue. But cash flow and revenue are not the same thing. The cash flow in a business is likely to be different from the revenue for the same period.
So what’s the difference and why does it matter?
Cash management in accounting becomes important for small businesses especially when there is a need to make a business purchase outside of the regular, predictable expenses of managing the business. While your business revenue (earned income minus expenses) might be “in the black” for the sample period, you may not have had the means to cover a big expense that could have benefitted the business in the long term.
For example, assume that your business revenue is consistently positive across a period of twelve months, but when you suddenly need to replace an expensive piece of equipment or technology, you don’t have the liquid assets to cover it. This could pose a major problem for your business and its future.
Managing cash flow is no simple task, though. Bills need to be paid, expenses need to be covered, and customers need time to receive and process your invoices. You don’t ever want to end up in a situation where you can’t cover your planned expenses or are losing money through normal operations. Effective cash management strategy should ensure you don’t even come close.
Here are our top tips for managing small business cash flow and cash flow improvement:
Tip #1: Keep The Right Records
Keeping the right finance records every month is crucial for good cash flow management. Cash flow statements, revenue statements, and balance sheets are all separate documents that paint the full picture of small business finance. It’s important to keep accurate records in order to look back and notice trends over time.
If you’ve been in the situation mentioned above, looking back on your financial records can help you determine why. Errors or near-errors like not being able to purchase inventory when you need to can be due to a variety of issues with your cash flow. These include long invoice processing times, fluctuations in employment or demand for your product, seasonal trends, and debtors that are taking too long to pay you what they owe.
Good record keeping will reveal that to you.
If your business revenue is steadily growing and you haven’t had any hiccups or delays due to lack of liquidable assets, keeping the right records can help you understand why. They can also help you look at patterns from past finances to determine next steps for strong, continuous growth.
Tip #2: Know When To Hire Someone
Maybe you’ve got a good grasp on business finance 101, but don’t have the time to commit to checking invoices or processing financial documents. Maybe you recognize that the time you’d need to invest for good record keeping and analytics is not a good use of resources. Maybe you’re not detail-oriented and your business is expanding.
Either way, know when it’s time to hire help and know your options.
If any of the above apply to you, or the thought of managing small business finances already has your heart rate spiking, fear not. There are some options.
- Hire an Accountant. Know someone who would be meticulous, detail-oriented, and thorough? It may be worth the expense to outsource this work to someone who specializes in it.
- Incorporate document processing automation, or a SaaS. Many financial processes can be automated and create reports for you based on your preferred metrics. There are many competitive SaaS for small business accounting and finance cash flow
- Outsource your accounting processes. Some services complete accounting and tax processes for you, with the help of a live human agent who is assigned to your account.
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Tip #3: Track Debts More Effectively
So what if your cash flow management issues are due to clients who take too long to pay?
Some businesses have a more laid-back, personable approach to life and to business. But if your clients’ delay in payment for services rendered or products shipped is disrupting your cash flow, it’s time to get real with them.
One way you can better manage your business cash flow and accounts receivable balance is to design accounting documents that are specific to your business. For example, you might incorporate an additional metric to account for soon-to-be-paid invoices, or to track how often a specific client or vendor is late or nearly late paying their balance.
Secondarily, you can automate correspondence with your clients via email that reminds them of payments coming due, or offers incentives for early payment.
Tip #4: Understand Liquidity
Some businesses with relatively high revenue invest that revenue into assets that will support the future of the business. This revenue may never take the form of liquid assets (currency or immediately liquidable investments) and is therefore unhelpful for the expenses that require immediate payment.
Even a business with great revenue gains over time can have cash outflows that exceed their cash inflows for a period due to poor planning. Understand and prepare for the sudden expenses that might occur due to equipment failure, employee turnover, an accident not covered by insurance, or an economic downturn caused by a public health or other unforeseen crisis.
Having the liquid assets prepared to cover another type of expense, like a huge inventory sale, can also help you better position your business for the future.
Tip #5: Know How To Increase Revenue
Easier said than done, right? We know this tip sounds like a no-brainer; it’s every business owner’s goal, isn’t it?
It sure is. According to best selling business and entrepreneurship author Josh Kaufman, there are different strategies to approach increasing revenue, and cash flow for business plays a role in deciding which is best to help YOUR business achieve positive cash flow:
- Increase your customer base. You can approach this by unifying online messaging and driving more clients to your business through social media channels and other content of value to them.
- Increase amount of sale per purchase. (A surplus of inventory might allow you to bundle or slightly decrease the sale price of products)
- Convince customers to shop more often. Again, this comes down to value for the price and brand loyalty (how are you meeting the needs of your customers)
- Increase prices. All things considered equal and stable, increasing prices will increase your revenue.
Watch Out For These Cash Flow Management Mistakes
Now that you have a better understanding of cash flow in business and how to master it, make it your own! But be careful, and try to avoid common pitfalls in cash flow finance:
- Don’t let tomorrow’s income be today’s checking account. Don’t overextend yourself financially because you’re excited about future revenue.
- DO be sure to keep records. Even if your record keeping becomes more sophisticated later, it is crucial to start with some system of organization for business finance. If you absolutely cannot organize yourself in this way, look to outside help.
- Don’t fly blind. It’s always better to have a plan and be prepared for potential disruptions than it is to react on the scene. Don’t wait for an unexpected expense to disrail you. They will happen.
- Track investments and learn how to grow your money. Don’t make investments early if you’re not sure how they will pay off later.
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