Few things are more important than cash flow for your business. You can pay your debts in time with a healthy cash flow, support your business and expand your business. You’re just a few wrong decisions away from financial ruin, without it.
This guide gives you an insight into how good cash flow management is, and we’ll allow you to get you back in black on 10 of our favorite cash flow management strategies.
What is Cash Flow Management?
Cash flow management is the process of tracking how much money is coming into and out of your business.
This helps you predict how much money will be available to your business in the future. It also helps you identify how much money your business needs to cover debts, like paying employees and suppliers.
Cash flow is the term used to describe changes in how much money your business has from one point to another. Cash flow management is keeping track of this flow and analyzing any changes to it. This helps you spot trends, prepare for the future, and tackle any problems with your cash flow.
It pays to practice cash flow management often to make sure your business has enough money to keep running.
- Positive cash flow: This occurs when the cash funneling into your business from sales, accounts receivable, etc. is more than the amount of the cash leaving your businesses through accounts payable, monthly expenses, salaries, etc.
- Negative cash flow: This occurs when your outflow of cash is greater than your incoming cash. This generally spells trouble for a business, but there are steps you can take to remedy the situation and generate or collect more cash while maintaining or cutting expenses.
Effective ways of Managing Cash flows:
Below are some of the best methods we’ve found to effectively manage your cash flow.
Keep an eye on your cash flows
First and foremost, you have to know the status of your cash flow in order to be able to manage it. This means keeping a close eye on every area of the business where money is involved, and regularly checking how much is being spent versus received.
Once you have a good idea of the business’s general cash flow health, you can begin to plan ways to improve it. If you find any problems, such as a few large expenses that mean more money is going out than coming in, then look for and apply a fix early on.
Cut out on costs
Use your cash flow statements to do a cash flow analysis and try to see whether there are any recurring expenses that you could cut back on. They could be in the form of bills on utilities, rent, payroll, subscriptions, or frequent services. If you think you need to reduce your expenses, try to cut the costs or negotiate payments where possible.
Have an emergency backup cash reserve
Who knows what might happen that could result in a worst-case scenario in which you are close to a cash flow crisis. A clear, well-thought-out backup plan can provide you with peace of mind and a source of reserve cash in case you need it one day.
Encourage early payments
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. Getting the money (if you can) is always better for your cash flow than a bad debt.
Ask for extended payment terms from suppliers
Another effective business cash flow management strategy is to ask your suppliers if they’re willing to extend their own payment terms. For example, if a supplier currently requires payment within 15 days of issuing an invoice, asking them politely if they can extend their terms to 30 days means you’ll have more cash in the bank to cover your own expenses in the meantime. The more you purchase from a supplier, the greater your bargaining power will be.
Know How Much You Need to Break Even
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.
Get cash for your assets
This tip is particularly important if you are looking to make some cash fast. Perhaps your business has some old equipment that is sitting in a storage room collecting dust. Do not let it become obsolete, consider selling it or renting it out to get cash out of it.
Upgrade from a Spreadsheet to Software
Decades ago, you had to tediously record every transaction manually to monitor your cash flow. Today, you have the advantage of technology, so use it! Store your spreadsheets in the cloud for easy access, or better yet, use accounting software like FreshBooks to stay on top of your cash flow.
Get a business line of credit before you need one
A business line of credit is a good insurance policy against cash flow problems. You may be able to get a line of credit for a percentage of your accounts receivable or inventory if you use them as collateral.
Sell out your inventory
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.
Why does cash flow matter?
Cash is the lifeblood of your business. A wise person once said, “revenue is vanity, profit is sanity, cash is reality.” If you don’t actually have cash on hand, your business will stop working. Managing your cash flow is all about figuring out when you’re going to have cash in your hands, figuring out how to get more of it in your hands faster, and how to manage your spending so you don’t run into cash flow problems.
Learning to manage cash flow is a foundational building block for managing your business finances. If you’ve got that down, then you can start thinking about how to really grow your business, improve your margins and profit, and grow a healthy business.
In the end, not all these tips or strategies will work for every business, so it’s on you how you choose any of these tips that can be suitable for your business.
Do not be afraid 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.