If you’re looking for one area to focus on that will significantly impact your business, it’s cash flow. It’s simple, you can be as profitable as possible and have many investors lined up, but you won’t get your business off the ground without cash flow management.
In fact, cash flow management is one of the many reasons it’s so hard to get a new business running and why so many businesses fail.
But what exactly is cash flow management, and why is it crucial for any business? More importantly, though, how can you improve your cash flow? This article delves into these questions in more detail and aims to give you some guidance to improve your business’s cash flow.
What is Cash Flow Management?
So, what is cash flow management exactly?
Your cash flow is the amount of money traveling into and out of your business. This means a positive cash flow is when more money comes into your business than it flows out. In contrast, a negative cash flow means that you’re spending more than you’re bringing in.
You calculate the cash flow by deducting the amount of cash you have available at the end of a specific period from the cash you have available at the beginning of the period. If this is a positive number, you’re showing a positive cash flow, and a negative number will indicate a negative cash flow.
You shouldn’t make the mistake of confusing cash flow with profits because you can earn a profit but have no cash flow. To understand your cash flow, you should look at things like your inventory, accounts payable, accounts receivable, debt, and expenditures.
Ultimately, cash flow management is the process you use to track all the cash that comes into and flows out of your business.
Why You Need Cash Flow Management
When you look at the definition of cash flow management, it’s easy to understand why it’s important. Cash flow is simply the lifeblood of your business. According to a study by U.S. Bank, 82% of businesses fail because of poor cash flow management.
This is simply because, without adequate cash in hand, you won’t be able to survive. Cash allows you to cover your monthly expenses or expand your business to help it grow.
Tips To Manage Your Cash Flow Better
If you want to manage your cash flow better, there are some tips you can use to make sure you don’t run out of money because, let’s face it, trying to run a business without money is like trying to paddle upstream without an oar.
Tip 1: Know Your Break Even Point
Although knowing the point at which you break even doesn’t necessarily give you better cash flow, it gives you a goal to work towards and gives you a target you can use to decide where your cash should go. In other words, when you have a target you’re working towards, you will be smarter about the way you spend your capital along the way.
Tip 2: Don’t Focus On Profits Too Much
Sure, making profit is important, but you should focus on cash flow and spending too.
For example, say you made a quite healthy profit, but you don’t invest that profit back into the business. This ultimately means that although you’re making a profit, you don’t have any cash flow to take care of your business’ day-to-day expenses.
Tip 3: Always Have Cash Available
Let’s face it, shortfalls happen to everyone. Although they don’t impact your cash flow directly, how you deal with them does. So, it’s always better to have cash reserves for when there is a shortfall so that you can lessen the blow and the stress and distractions that come with it. Instead, you will be able to focus on growing your business.
Tip 4: Manage Fund Better
In as far as possible, you shouldn’t handle the money for your business and rather hire an accountant or CFO to do it for you. If you can’t afford someone to help, designate a trusted employee to be your cash flow monitor.
Tip 5: Immediately Collect Your Receivables
Try to make your invoices due immediately and limit the use of payment terms longer than 15 days. By doing so, you make sure that there’s always some cash available in the business. Even better, if you can, delegate the task of keeping an eye on your receivables and customer follow-up to get the money in as quickly as possible.
Tip 6: Offer Discounts To Get Paid Earlier
If you don’t want to wait out the payment terms, offer your customers a discount if they pay early. But remember not to make it a free-for-all and set strict guidelines about customers’ eligibility for discounts.
Tip 7: Extend Your Payables
While you want your payments to come in as soon as possible, the opposite is true for your accounts payable. Work with suppliers and vendors and, where possible, extend payment terms to 60 days or more.
Tip 8: Cut Costs
As part of your forecasting, you’ll see the necessary expenses you’ll have to pay in the future. Apart from those necessary expenses, minimize your spending and eliminate any costs that aren’t strictly necessary for the running of your business.
Tip 9: Be Clever About Hiring
Instead of hiring two or three employees with lower salaries, consider recruiting a highly skilled worker who is likely to be able to tackle the work of two or more less-skilled workers. Sure, you’ll probably spend a bit more to hire have a highly skilled employee, but you will still spend less than you would on multiple employees doing the same thing.
Tip 10: Use Technology
Technology’s out there, so why not use it. For example, think of using invoicing software to stay on top of your receivables or use mobile payment solutions to help you get paid faster. Also, always back up your files and cash flow spreadsheets to secure cloud storage that will make it easier for you to gain access from anywhere and keep your files safe.