Cash is king – yes, this is the rightful mantra for proper financial management of any enterprise. Now, especially when it comes to a small business, proper cash management is in fact the key to survival. Shortage of working capital might render it difficult to pay employees and suppliers on time or to source raw materials for your business. With proper and planned cash flow management, you can maintain enough working cash to operate through such crunch times. It helps solve the major issue of time lapse between payment to your suppliers and receipt of payment from your customers. In short, cash flow management delays outlays of cash up to the maximum possible duration.
However, before discussing the various methods on how to manage cash flow for small business, let us look into some of its basic concepts:
So, What Do You Mean By Cash Flow?
(Cash Flow = Cash Inflow - Cash Outflow)
Small-business owners need to stay at the top of their cash flow. Cash flow simply means the amount of cash remaining with you after deduction of outbound payments from total money pumped into the business. It is essential to monitor your cash flow statement on a regular basis – monthly, quarterly, or weekly – to keep track of your business pulse. Cash flows can further be classified into two categories:
This means that the cash you receive from sales or accounts exceeds the amount you spend through payments, salaries, expenses, and others. A positive cash flow usually signifies that your venture is doing well.
This means that your incoming cash is less than your outgoing cash. It generally signifies that your business is having some kind of setback. Sometimes, even a profitable business might show negative cash flow. Hence, just looking at your profit and loss statement may not prove sufficient – you need to consider several factors such as accounts receivable, inventory, accounts payable, capital expenditures, and taxation.
The basic strategy behind how to manage cash flow for small business includes proper monitoring of the above factors along with your profit and loss statement. Therefore, in the following paragraphs, we shall underline eight of the major tips for effective cash flow management.
8 Tips For Effective Cash Flow Management
1. Always Measure Your Working Capital Needs
Keep a proper measure of how much working capital you need for your business operations. Consider key metrics such as the amount of inventory required to be kept on hold, overdue invoices, tied-up cash during work-in-progress, and time gap between supplier payment and cash receipt from customers. You can use an accountant, accounting software, or spreadsheets to keep track of cash-in vs cash-out for a stipulated period of time.
2. Financing Your Assets
Why use cash funds to purchase assets in the business when you can finance them? You get to keep the vital cash within the business, allowing you to grow and develop better systems and other areas. Loans or finances (with a variety of payment options) are used to purchase a car, truck, or machinery for the business. Not only do you get to keep this cash in the business but you get the chance to avail various tax benefits.
There are two types of financing options available. You can opt for short-term financing for emergency purchases or to minimise the gap between payables and receivables. Another alternative is long-term loans, through which you can purchase large assets such as real estate or equipment.
3. Collect Your Receivables Early
One of the common mistakes that businesses do is to wait till the end of the month for generating invoices. Instead, to avoid late payments, bill early. Also, keep in mind to make your invoices clear and detailed. Generate them just after delivering your product or services to the customer and collect your receivables.
Did you know?
❖ More than 60% of small businesses in Australia suffer from the issue of late payments
❖ Approximately 30% of small-business owners claim that late payment is the biggest barrier for growth
Another method is to go for progressive invoicing. Here, after receiving the order, you ask your customer to give a deposit. Later, you can agree upon percentage payments as various stages of goods manufacture or service delivery. Waiting for a long time to recover overdue amounts is often risky. Consider offering discounts for regular payments and giving online links on invoices for convenient payment options.
4. Sell Obsolete Inventory
Obsolete inventory, that you no longer use, results in tied-up working capital and usage of valuable space. In this scenario, you can consider selling idle equipment or inventory for some quick cash. Assets for long durations often become useless since customer requirements change with introduction of new materials in the market. Hence, consider selling any inventory that most likely won’t be used in the next one year and liquidate cash tied up with assets.
5. Be Ready For Business Risks During Cash Flow Budgeting
When you are preparing your early forecast for cash inflows vs cash outflows, always keep space for hypothetical situations. These may include – non payment from a client, cancellation of a big order, receipt of a bulk order, or non-availability of a customer who still owes you payment. Make such risk analysis a part of your cash flow budgeting process. Also, it is strongly advisable to always keep aside some amount of buffer cash in the bank for a rainy day.
6. Keep Personal And Business Accounts Separate
Usually in case of start-ups, owner's mix up their personal and business accounts. This is common since most of the initial financing often comes from his personal savings. But it is strongly recommended to keep a separate bank account for your business. Through a bank-issued credit card, you can make all your business-related expenditures. The detailed report on the various types of purchases made over the month or year will help you in preparing a better cash flow budget for the next year.
7. Devise Methods to Cut Costs And Grow Cash
Always keep a sharp lookout for cost-cutting opportunities, even though your business might be generating steady profits. Also, save your balance cash in interest-earning accounts. Moreover, do not go for long-term certificates of deposit, which might lock your cash in for a specific period and claiming it earlier may result in interest payment.
8. Maximise Cash Inflows And Minimise Cash Outflows
As a small business owner, you can devise several methods to increase cash flow. Opt for a subscription model, where customers prepay and you also have the advantage of securing future payments. Another alternative is a layaway program, where customers choose a product of their choice and reserve it for future purchase. The product is delivered only after the payment is made. Keep a credit card option available for certain and quick payments
Some of the strategies to minimise cash outflow through cost cutting include – repairing equipment or replacing parts instead of buying new ones and going for used equipment. In fact, there are various options for securing a best deal on your used car loan. Also consider upgrading your products only when it is absolutely necessary.
Major Takeaways And The Way Forward
Saving and keeping an adequate amount of buffer cash renders an enterprise flexible. Especially in the case of a small business, it opens up a plethora of opportunities. As a start-up owner, you must be aware of the fact that profits have no meaning without cash availability in the business. Several companies file for bankruptcy within the first six months of their inception. This is because the amount of cash coming in is less than the amount of cash going out. Due to improper cash flow management, such firms might lack in making competitive investments or have to borrow more money for the functioning of their company.
So, have you ever faced the consequences of improper cash flow management? Do you think our tips for how to manage cash flow for small business are helpful? Kindly leave your thoughts in the comments below.