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Exercising good flow cash management helps you make sound investments that will maintain your competitive edge in the market. It also ensures you won’t need to resort to taking loans just to keep your small business functioning.
Over the years, studies proved that a profitable business would still fail without proper cash flow control. It is critical both for starting and growing businesses. As business owners, it is equally important to have good cash flow management and identify cash flow management problems your business might experience.
What is Cash Flow Management?
Cash flow is simply the movement of funds in and out of your business. It is important to keep track of, analyze, and optimize your business’s cash flow.
Essentially, there are two kinds of cash flow: positive cash flow and negative cash flow.
Positive cash flow management occurs when funds funnelling into your business (sales, accounts receivable) exceed the amount of cash leaving your business (accounts payable, monthly expenses, employee salary).
On the other hand, negative cash flow occurs when your cash outflow is greater than your incoming cash. Having a negative cash flow is generally bad for a business, but it is a problem that can be fixed by cutting back on certain expenses or generating more inflow of cash.
As business owners, achieving a positive cash flow is the goal. Experts suggest doing cash flow management analysis to develop strategies that effectively control the inflow and outflow of money.
Profit vs Cash Flow
A common misconception many people have is that profit equals cash flow. However, looking at your profit and loss statement will not give you an insight into your cash flow. There are a lot of other factors you need to consider to properly analyze your business’s cash flow, such as the following:
- Accounts receivable
- Accounts payable
- Capital expenditures
- Debt service
The main difference between profit and cash flow, according to accountants, is as simple as this: invoicing your customers for products or services sold to them generates revenue, but the act of collecting the money is what creates cash. In other words, you might know you earned a profit while not knowing what happened to your cash.
Positive cash flow is necessary for generating profits for your business. You need cash to pay your workers and to produce the goods and services. Structure your business to have a positive cash flow to increase your profits.
How to effectively manage cash flow?
You can’t control what you do not know. That is why part of effective cash flow management is keeping your books updated. Cash flow is only as good as your business’s accounting and reporting.
Invoicing is another factor in good cash flow management. Proper invoicing entails sending invoices right away after delivering a product or service. This way, you get paid quickly. Collecting payments faster is crucial in good cash management because you need to have the actual cash in order to control it.
That is why a lot of companies offer discounts for customers who pay early. Another good strategy is to ask for a deposit or milestone payment, especially for services like graphic designing, marketing, PR, or construction.
Cutting or delaying expenses also works.
Especially if customers can’t pay faster. You can use either lower cost inputs for production, cut hours spent on work, opt for hiring part-time employees, or consider exhausting your current inventory before purchasing new ones. You can also request more favourable payment terms from your vendors. Just make sure you maintain your integrity all throughout – ensuring timely payments, for instance.
You can also shrink cash outflows by opting for repair over the replacement of capital equipment and buying used equipment instead of brand new ones. Moreover, delaying product upgrades until absolutely necessary and bartering products for supplies and services effectively cut cash outflow.
When cash is tight, you can take certain measures like selling or leasing idle equipment, selling future revenue (also known as a merchant cash advance), and selling invoices (invoice factoring, invoice discounting, invoice financing, etc.).
Access to cash will make or break your business; that’s why building a cash reserve is a wise move for business owners. Cash reserves provide the cushion you need to manage unexpected events and give you the confidence and finances you need to grow your small business.
You can also keep your cash working.
By placing your cash balances in interest-earning accounts. Since the interest rates may be lower than those of savings accounts, certificates of deposit, or money market accounts, you can also consider keeping a bulk of your funds in higher-paying accounts. That way, your cash continues to earn while it is on standby or not being utilized.
Of course, keeping your business and personal finances separate is essential if you want to understand your business cash flow management and forecast changes.
It is also important to have foresight as a business owner. Identifying possible future risks or problems, and preparing contingency measures, help you position yourself to be ready to act and fix the problem before it goes on too long or gets worse.
Don’t fail to plan. Sooner or later, your business will experience a cash shortfall., as this is a normal thing for business owners to experience. However, the key to surviving a cash shortfall is in becoming aware of the problem as soon as possible. Arranging for a line of credit at your bank for such events before it happens is vital.
As a small business owner, you might tend to focus too much on raising your company’s profit margin. While it is important, you should also keep an eye on your cash flow management. In business, “cash is king” because, without cash, profits are meaningless.
A lot of profitable businesses on paper ended up in bankruptcy because of negative cash flow and lack of proper cash management. However, with positive cash flow, and excellent cash management, profits will surely be ensured.
Moreover, building and keeping adequate cash reserve gives you peace of mind and provides maximum opportunity and flexibility to your business.
Consider these strategies and decide what is best for your business. Seek advice from financial experts regarding your business cash flow management. Reasonable cash flow control is essential to ensure sound financial health and growth for your company. For more cash flow management quick tips and mindset you can follow us in our Instagram account.