Managing Cash Flow: For any small business, managing cash flow effectively is critical to success. Having enough cash on hand to pay employees, suppliers, landlords and other expenses is vital, yet many small businesses struggle in this area. By understanding your cash flow and taking some key steps, you can better control your business’s financial health. With that in mind, let’s explore how you can manage your cash flow as the owner of a small business.
Understand Your Cash Flow
Before making any changes, take time to understand what your current cash flow situation looks like. Look at the past 6-12 months of financial statements and categorize where money is coming from – accounts receivable, new sales, and loans. Also categorize where money is going out – rent, payroll, inventory, supplies, contractors, etc. Finding patterns and trends will highlight where there may be cash flow gaps.
With this baseline understanding, you can then forecast future cash flow based on predictable income and expenses. Comparing historical cash flow to projected cash flow will quickly show where potential shortfalls could occur and how much cash is needed to cover them.
Optimize Billing Cycles
Managing Cash Flow: With insight into sales and accounts receivable cycles, optimize when and how often clients and customers are billed. Shortening billing cycles ensures payments come in faster, reducing gaps between money going out for expenses and money coming in from clients. Automate billing and reminders when possible to keep cash flowing steadily. Consider getting deposits or installments, especially for larger service contracts or orders. This can help you avoid cash flow difficulties.
Renegotiate Payment Terms
Just as you work to accelerate incoming payments, also try renegotiating when and how you pay certain expenses. For example, rent and some vendor bills may be able to be paid in 30 days rather than 15 or 7. Even an extra week or two allows you to hold onto cash longer and bridge potential gaps. Explore Trade Credit which pays expenses over a period of time, allowing you to purchase inventory or other assets.
Leverage Credit Strategically
Managing Cash Flow: Business credit cards, lines of credit and other facilities allow strategic access to cash when needed. Only use them to bridge actual cash flow gaps, not to fund growth or major purchases which increase debt burden. Using personal credit or assets should also be avoided as it puts personal finances at risk. Compare options to find the lowest rates and fees. Automate payments to avoid late fees or interest rate spikes.
Build An Emergency Fund
Having cash reserves is vital to managing cash flow fluctuations and unexpected expenses. Build at least 3-6 months of operating expenses in a bank account or low risk, liquid investments. Contribute each month until reaching the emergency fund target. Only use this when critical, and promptly replace any withdrawals. It provides security knowing there are reserves to handle a major client payment delay or equipment repair without disrupting finances.
Stay Lean
Careful monitoring of expenses and keeping operations lean is crucial. Review budget line items monthly to find opportunities to reduce spending on tools, supplies, software subscriptions etc. Renegotiate contracts around phone/internet, insurance etc. to cut monthly costs. Set limits on travel, office perks and bonuses until cash reserves are healthy. Avoid unnecessary hiring or expanding until the existing business has strong, consistent cash flow.
Managing cash flow is less about specific accounting tools and more about discipline, planning and commitment to financial health from month to month. Understand cash flow cycles, control spending, accelerate incoming money and have backup reserves. Making cash flow a priority and taking both strategic and disciplined actions allows small businesses to take control of their financial success.