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Cash flow is the lifeblood of any business. For a business to thrive, it must generate sufficient positive cash flow to sustain itself. It lets you pay employees, expenses, taxes, and vendors on time.
Cash flow management is especially critical for small businesses, which frequently lack substantial cash reserves. The key to success in this area is setting up systems that accurately capture money coming in and going out. The goal is to generate more inflows than outflows at any given time.
Businesses can use a few strategies to ensure positive cash flow. These include the following:
#1 Improve Receivables
If you have clients that take a long time to pay you back, this could severely affect cash flow. However, it may not be their fault. Sometimes, the payment terms could reach up to 60 or 90-day cycles. Larger enterprises can accommodate this extended period. But if you want healthy cash flow as a small business, you must find ways to lower this.
Consider using invoice factoring to improve cash flow. It refers to selling your outstanding invoices to a third party, which instantly pays you the bulk of the total amount of the said receivables, usually up to 90%. As soon as the factoring company receives the full payment from your clients, they pay you the remaining amount owed to you.
For instance, if you’re running a staffing agency and your financial resources are suffering due to the staggering number of outstanding invoices, one of the best steps you can take is to improve cash flow with staffing factoring. This way, business expenses, such as salaries, would be promptly handled.
#2 Do A Cash Flow Forecast
It’d be best to have a good idea of the working capital your business needs to remain operational. Regularly generating accurate cash flow forecasts is the best way to accomplish this.
Here’s a brief overview of the steps you should take when developing a cash flow forecast:
- Select time frame – A cash flow forecast could cover a week to several months. So, it’d be best if you chose a specific time frame.
- List your income – Record all your weekly or monthly income, which includes sales, tax refunds, and grants.
- List your outgoings – Record all your weekly or monthly cash outflows. Examples are rent, loan fees, and salaries.
- Calculate running cash flow – You must review projected cash flows against actual cash flows at the end of every week or month to establish the running cash flow.
You could compile a cash flow forecast independently, especially if you’re a small business owner. However, working with an accountant to eradicate errors may be wise. Alternatively, you could invest in an advanced accounting or financial management system.
#3 Optimize Inventory Management
If you have inventory items that aren’t selling well, you should buy them less frequently. Stocking up on these things is a bad idea because it increases your business expenses, particularly storage costs.
Using inventory management software will make it much easier to keep track of your inventories. You can also benefit from this tool’s just-in-time (JIT) approach, ensuring you have the right number of supplies at any particular time.
#4 Manage Expenses
To properly keep track of your cash flow, you must accurately calculate your expenses.
Fixed expenses, such as rent, insurance, and loan repayments, are easy to account for. On the other hand, variable expenses, like commissions, credit card fees, and production supplies, are more difficult to forecast. However, you could use last year’s financial statements to arrive at an estimate.
You must review your business expenses regularly. The goal of any business is to lower costs where possible. But that’s not always easy. Nevertheless, outsourcing certain parts of your production process to third-party service providers may be a good idea to save costs.
#5 Lease Equipment
Instead of purchasing equipment for your business, consider leasing it. Leasing equipment is better for cash flow because it prevents you from spending a huge amount of cash all at once. It also reduces your short-term financial commitments. You can lease the likes of vehicles and computers to gain access to the latest features without breaking the bank.
#6 Get A Line Of Credit
Opening a business line of credit long before you need to borrow money is wise. Your chances of getting rejected when you apply for one while your finances are in shambles are high. Nevertheless, having a line of credit will be helpful when your business is experiencing growing pains or has hit a rough patch.
If your business is experiencing poor cash flow, perhaps because it sells seasonal products, you can use your line of credit to cover some of your costs in the short term.
It’d be best not to rely solely on business credit to finance your business, but it’s an ideal fallback when you hit a rough financial patch.
Conclusion
One of the most important determinants of business success is cash flow management. You could get away with poor cash flow management in good times. But when things are uncertain, the wrong strategies could lead to failure. You need cash to survive the ebbs and flows of a business. So, take time to review your finances regularly. That way, you can manage cash flow more efficiently.