Managing cash flow effectively is a crucial part of doing business, and one that many find challenging. Small businesses especially find cash flow to be somewhat of a foreign concept – isn’t enough to count your money as you make it?
Nope, it’s not.
Cash flow is more than just business profits, and having a profitable business does not necessarily mean you have positive cash flow.
When we refer to cash flow, we are talking about the amount of cash being transferred into and out of a business. Having positive cash flow means your business has cash in the reserves to reinvest in operations, or settle debts. Free cash flow covers more than income – it refers to the money that a business has left after settling debts and covering operating costs.
Getting a better understanding of cash flow means you have a better understanding of your business on the whole, and that you will be able to confidently make improvements in the company – such as upgrades to technology, or adding more staff – without losing sleep over whether you’ll be able to cover the costs.
Understand Where You Stand
The easiest way to get a picture of your finances is through a tracking software. Using a bookkeeping/accounting software simplifies the process of tracking your business cash flow. Not only can you run reports and get a clear picture of the layout of your finances, but many systems enable you to automate actions such as matching payments to invoices, which is a game changer for small businesses where oftentimes many people are wearing many hats.
Investing in an accounting software is a business expense that will repay you, as you’ll save time and money by being able to streamline this aspect of your business, and get organized. Once you have a current picture, you can begin to forecast your cash flow based on these insights.
Plan for Success
Once you have a handle on finance management and workflow, it’s important to create a business plan. Businesses who just tackle each day one at a time may float for a while, but eventually you’ll run into trouble without an idea of where you’re heading.
A business plan serves as a guide and keeps your objectives clear. It doesn’t have to be set in stone and in fact, it shouldn’t be. Sure, you should have your goals clearly outlined and the points or plans to achieve them. The plan should be agile enough, however, to adapt to economic or business conditions.
Don’t worry about needing to tackle a huge, lengthy document with every facet of your business defined. Instead, start simple with your goals and objectives, and adapt it organically. Here’s a guide on developing a business plan, which should essentially be a picture of what you want to achieve, and how you’re doing to make it happen. Not only will this plan help you to see your potential, but you’ll also be able to track places you’re struggling and catch them before you fall.
Look at Your Payments and Invoicing
It won’t come as a surprise to many that by looking at the payments you receive, and how you send or pay invoices can make a drastic impact on your cash flow. Here are a few things to consider:
Accept a variety of payment methods
By giving your customers a range of options on ways to pay you for your goods or services, you are likely to capture more business and to be paid more quickly. Accepting a variety of payment methods – such as credit or debit cards, eWallets, and mobile payments – gives you an advantage in the marketplace.
If you’re a business who accepts payment after delivering goods or services, or on a rolling payment schedule, make sure you’re sending invoices quickly and staying on top of reminder letters for those who don’t pay quickly. Encouraging early payments can go a long way (whether it’s a small discount for early payments, or a more attractive price for a full payment up front rather than on a billing cycle), and you can also set a late payment penalty to encourage punctuality.
Keep security in mind
An unfortunate reality of doing business, is that fraudsters are out there wanting to make their money the easy way. By being security-conscious when accepting and processing payments, you improve your cash flow by reducing loss due to fraudulent purchases. Make sure your payment processor has your best interests in mind, with strong fraud protection and risk management practices to keep you protected.
Check payment terms to vendors or suppliers
If you’re selling goods, you’re likely working with suppliers to stock and ship your inventory. If that’s the case, review the payment terms you have with them. If you have a positive relationship with vendors, it doesn’t hurt to ask for longer payment terms, giving you a bit of extra time with your income.
This is also a good time to mention, you can look into your service contracts for things such as phones, internet, support, etc. Is there an opportunity to renegotiate these terms, or look at other suppliers?
Check Your Prices
Oftentimes, businesses feel like they have to be the lowest price on the market in order to capture customer attention (and purchases). That may help matters, but take a moment to look at your offering and do some research in the market. Is there a chance you can raise your prices, even if it’s only on a couple of items? There’s no harm in experimenting with price changes, and if you see that it has a business impact, you can adjust accordingly.
Another option to explore is bundling products, either multiple of the same, or products frequently purchased together. This makes it easier for customers to buy more, which of course impacts your cash inflow.
Consider also loyalty programs, or discounts for frequent purchases. Rewarding repeat customers is a great way to keep them with you.
Know Your Flow
Overall, the best way to improve your cash flow is to keep a thorough and clear view on your business income and expenses. By diversifying payment types, streamlining processes, and not being afraid to experiment based on insights you receive from profiling your business finances, you’ll certainly see an impact on cash flow.