1 Challenge
- “I want to improve my business cash flow.”
2 Questions
- “How can I track and monitor my cash flow?”
- “Is it possible to improve cash flow?”
3 Ideas
Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business.
If you are a small business owner, you already know the importance of a healthy cash flow. To grow your business and make future plans for expansion, you must keep track of your company’s cash flow or liquidity, i.e. the money coming into and going out at any given time. A failure to do this has led to the downfall of many companies over the years. In fact, poor cash flow management is often cited as one of the primary reasons for business failure. This is especially true of small businesses.
The good news is that you don’t have to join these dubious ranks. You can keep running your business, and take it from strength to strength with efficient cash flow management. And in this article, we’ll show you how to do exactly this.
Before diving into the list, keep in mind that cash flow is not revenue or profit. Yes, revenue does contribute to cash flow. However, there are other sources that can also affect cash flow. Also, revenue can only be positive (inflow), while cash flow refers to both cash inflows and outflows, so it can be a negative number. And this is the situation you want to avoid.
Read on to know three ways to improve your business cash flow.
#1: Monitor Cash Flow
It’s impossible to improve anything if you don’t know what’s wrong. So, if you want to improve cash flow, but don’t know where you currently stand, you will struggle to meet your goal. This is why it’s important to constantly monitor and measure your business’ cash flow.
To monitor your cash flow:
- Measure your cash flow from various sources (INFLOWS):
- Business investments
- Loans
- Bank account balance
- Cash from sales
- Cash from the sale of equipment (or inventory)
- Any other cash source
- Calculate monthly expenses (OUTFLOWS):
- Working capital
- Rent or EMI
- Salaries
- Marketing costs
- Cost of utilities
- Cost of overheads
- Taxes owed
- Loan repayments
- Any other expense
Net cash flow = Outflow – Inflow
Make sure you measure inflows and outflows regularly to keep an eye on net cash flow.
#2: Increase Cash Flow
Difficult as it may seem, it is possible to increase your business cash flow. First, you need to understand the various options available to you. Next, you need to take action!
Here are some ways to increase cash flow and improve your business’ financial health:
- Liquidate unused or obsolete inventory or equipment
- Invoice immediately
- Incentivise customers with early payment discounts
- Charge fees for late payments
- Ask for a cash advance for project-based work
- Schedule regular payment intervals to ensure that costs don’t eat into cash flow
- Offer multiple payment methods
- Add new products or services to increase sales
- Sublet unused office space
Apart from the above strategies, you can also apply for invoice financing or business funding to increase cash flow. With invoice financing, you sell the lender your unpaid invoices at a discount in exchange for some agreed-upon upfront payment. The strategy is useful when your business has many unpaid invoices. There are many kinds of business funding options available to small businesses, including lines of credit, business loans, and business credit cards. Before finalising one option, do your research on the terms and conditions, and make sure they won’t unnecessarily burden your business.
#3: Maintain a Cash Flow Reserve
A cash flow reserve can help your business survive if there are current gaps in cash flow. You can build a cash reserve with a business line of credit (LOC). With an LOC, you get a predetermined credit limit that you can withdraw funds from as required.
Maintaining the reserve is easier if you can keep operations lean and cut out unnecessary expenses. Do you need a large office space? All that unused equipment sitting in the storage room? Do you require new inventory if older inventory is still sitting unsold in a warehouse? Can you operate with a hybrid team of freelancers and full-time staff instead of just full-time staff who you have to pay regular salaries to? Can you pay vendors early and ask for early payment discounts? Think of all these aspects, and weigh them carefully before making any decisions.
Conclusion
Maintaining a positive cash flow is not always easy. However, it is essential. Your business depends on it! When it comes to cash flow management, be proactive. Don’t wait until you run into problems. Regularly monitor your cash flow, control expenses, and maintain a cash reserve. By using the tips explained here, you can effectively manage cash flow, maintain business continuity, and even boost your company’s bottom line.
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