Looking after your cash flow as a small business

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Date: 14 February 2020

A café owner works on his accounts and calculates his cash flow and working capital.

When it comes to the financial management of a business, it’s often said that cash is king. Whether you have a thriving business or are struggling, managing your cash flow is absolutely essential to further growth. For many, it’s the most important key to business survival.

If you don’t manage your cash flow properly, you may be faced with a cash crunch that prevents you from completing simple but necessary tasks such as buying materials, paying suppliers or even paying salaries.

It’s vital that you maintain a level of working capital that enables you to push through those crunch times and continue to operate as a business. Here’s what you need to know.

The basics of cash flow 

So, what is cash flow exactly? In basic terms, it’s the movement of funds coming in and out of your business.

Positive cash flow is when the cash coming into your business from sales is greater than the amount that is leaving your business in the form of salaries, monthly expenses and accounts payable, etc. 

Negative cash flow happens when the amount of cash leaving is greater than the amount you have coming in. This usually means trouble for a business. However, there are a few steps you can take in order to fix the negative pattern and convert into a positive. Cutting down on expenses is one of the quickest ways you can do this.

If you get into the habit of only looking at your profit and loss statement to understand how well your business is doing, you could be getting yourself into trouble. This isn’t enough for cash flow management. You need to factor in many other financial figures such as accounts receivable, inventory, capital expenditures, taxation and accounts payable. 

You need to have a strong understanding of each of these areas in order to correctly manage your cash flow.

How to fix cash flow problems

Here are some of the solutions available if your cash flow is negative:

  • Cutting down on expenses: This is one of the first areas that you should look at if you are experiencing cash flow issues. You could look at postponing company benefits such as the latest mobile phones or laptops each year for your employees, reduce mobile phone bills with things like sim-only plans, try to find new suppliers for office equipment, and so on. 
  • Short-term finance: This is a line of credit that you can use to make emergency purchases. It can also be used to bridge the gap between receivables and payables. Many banks will provide you with a business credit card that you can use to pay for things when needed.
  • Long-term finance: Big-ticket items like equipment and real estate are usually purchased with long-term loans, rather than coming straight from your working capital. This enables you to spread the payments over the average life of the assets you purchase. Bear in mind that you’ll be paying interest - but you will be able to preserve your working capital for business operations.
  • Liquidate cash tied up in your assets: If you have equipment that you no longer use or an obsolete inventory, consider selling it in order to generate quick cash. Having non-working, idle or obsolete equipment only ties up capital that could be used elsewhere. Excess inventory can also quickly become worthless, especially as customer requirements change. If it’s unlikely to be used in the next 12 months, consider selling.
  • Recover your debts: Make sure your invoices are clear and as detailed as possible, including when you expect to collect payment. It may also be worth changing your billing practices so you’re able to invoice frequently instead of waiting until the end of the month. Generate your invoice as soon as your service has been completed or your product has been delivered. If you can get upfront payment, that’s even better. If you’re dealing with large amounts of money, large orders or continuous service, one way to control your cash flow better is to ask for a deposit and bill as you go along. 
  • Try to delay your outgoings: This might seem simple, but it is often forgotten about. Unless there is an incentive that makes it worth your while to pay up early, work out how late you are able to pay your suppliers without incurring an extra charge or damaging your relationship. This keeps your funds in your account until the latest point possible.

Best practices for managing cash flow

It’s important to maintain a healthy cash flow in your business on a day-to-day basis. Let’s have a look at how you can do this: 

  • Identify risks and prepare for them: There are certainly a lot of risks involved with running a business, and it’s likely that you will face some at one point or another. You should try to have at least a month’s worth of outgoings to one side. in case of emergency. You also need to think about any potential high-risk scenarios, such as expensive repair bills if key equipment breaks down, and ensure you’re prepared. Good insurance could save your business.
  • Create a business bank account: One of the most common mistakes small businesses make is starting off using a personal bank account or credit card. Initial funding usually comes from an owner’s personal savings, making it too easy for business and personal finances to become muddled, and cash flow becomes harder to track. Open a separate bank account for anything to do with your business. 
  • Monitor your inventory: You should always keep a close eye on your inventory. It’s important that you are able to identify which of your products are selling and which are duds that are soaking up your capital. You can then make the appropriate changes. 

Copyright 2020. Article was made possible by site supporter Jeremy Bowler

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