Cash flow is just about the life of any business, it’s simple – cash coming in and cash going out have got to balance out some way. A positive cash flow occurs when the amount of money coming into the business is more than the amount going out within that same period.
Learning to manage cash flow is, therefore, one of the most vital lessons that small business owners need to learn. No doubt, it is also a very challenging one since small business owners sometimes have to go to lengths in order to get money from customers.
It may also be really tough if you’re just starting out. So here are some guaranteed tips to help you out with managing cash flow and staying in the positive.
1. Determine Exactly How Much You Need Monthly
Even though you are running a business, you would still need some money for your own personal upkeep. So you need to determine exactly how much this is so that you know what you have left for the business. The next step is to subtract all the expenses for your business such as rent and salaries.
When you have all of these figures, then you would know exactly what you have to work with. In addition, since you are already quite established, you should set some cash aside as emergency savings just in case some situation that would affect cash flow pops up.
However, if you are just starting out, then you would need to keep your income to the barest minimum and allocate more funds for expenses. Being conservative is a lot better than ending up in a financial quandary.
Once you have built your business up and it is considerably strong, you can then raise your income if you want to. But for the sake of cash flow, were to the low-income side first off.
2. Keep Up With Your Invoices
Invoices are a great way to record a business transaction and are a very essential part of any business. It is essential that you match up with the flow of paperwork, so after preparing your sales invoices, sending them out promptly and regularly would help you stay on top of cash flow.
It is so much easier in recent times since there are various software to help automate the process. Also, ensure that you send reminders to customers with unpaid invoices some days before they are due. Keeping up with invoices is a great way to keep cash flow positive.
3. Study Your Own Cash Flow Pattern
Most businesses usually have their own unique or distinct pattern that dictates income and expenses. In order to determine your cash flow pattern, you must, first of all, know how to calculate the expected returns for your stock. After calculating this, you can then go ahead to determine your cash flow pattern.
Knowledge of your cash flow pattern would help you to make financial decisions to.keep you in the green – like deciding how much cash to keep and how much to put back in the business at any point in time. In addition, your cash flow pattern helps you to forecast sales and revenue easily.
4. Ensure That Your Receivables Match Your Payables
This aspect is a commonly overlooked one in small businesses. In order to keep your cash flow in the green, money coming in would have to counterbalance money going out some way. Therefore you need to factor in the payment terms for your suppliers and the terms that you provide to your customers.
If you are expected to pay your suppliers within a shorter time period than your customers are expected to pay you, this would create a gap.in your cash flow. As much as possible, make the terms of payment with your suppliers identical to those you provide your customers with.
For instance, if your supplier charges a penalty on late payment, ensure that your customers are also privy to a term like this. This may serve as a motivation to make them pay up on time, also, even if you end up having to pay a penalty fee, it is already covered by customers who defaulted.
5. Minimize Cash Outflow
Cash spent on the stock is great – it is basically regular expenditure. However, there are certainly other expenses that you do not have to incur. For instance, instead of replacing a faulty machine, fixing it may be a better option.
Similarly, spending money on maintenance of your equipment would help you prevent a large amount of money going out for a new one and disrupting your cash flow. In addition, going for a more expensive option when a cheaper one would do the job just great is pretty much a waste of money.
However, this doesn’t imply that you should go for low-quality equipment or supplies because you may consequently have to spend more than you would have if you had gone for great quality once and for all.
Now, these are five great tips to ensure that your cash flow stays positive. And one feature of all these tips is that they all involve taking action. As a small business owner, you need to be firm if you want to stay in the green, and applying these tips would easily guide you on what you need to do.