The Importance of Managing Cash Flow for a Business
Managing cash flow is essential for the health of your business. Ideally, you want to aim for positive cash flow at the end of every month after payments and expenses.
Unfortunately many small businesses struggle to manage cash flow and get into trouble. Nearly 50% of small businesses fail within the first five years, and around 80% of these blame poor cash flow management.
Here are five ways to ensure your cash flow is at the healthy end of the spectrum so your business doesn’t end up a statistic.
1. Monitor your cash flow
Keeping track of your finances is crucial. A cash flow forecast kept over a 12 month period is a useful tool to anticipate the movement of cash in and out of your business and identify projected income and expenses.
Use quality accounting software to get real-time visibility of your finances so you can maintain a positive cash flow position.
2. Tighten up payment terms
SMEs struggle with cash flow because larger businesses tend to pay invoices late. To counter this, issue invoices promptly with clearly defined terms and conditions for payment. Offer a range of payment options to make it easy for your customers to pay you.
Avoid late payments by establishing shorter payment terms and consider adding a late payment fee or incentives for customers who pay early. Consider asking for a deposit or 100% payment up front for large invoices.
3. Increase sales & reduce inventory
SMEs in a cash flow negative position need to look at ways to turn it around quickly. Try to increase sales by using a social media advertising campaign. This is a cost effective technique to promote your products, encourage sales and attract new customers.
You should also actively reduce inventory and keep it at a low level. Too much inventory will sit in the warehouse and tie up your cash. Look for opportunities to streamline processes and reduce operating costs.
4. Build an emergency buffer
A cash reserve allows you to manage unexpected expenses and take advantage of opportunities for growth and investment. It also gives you peace of mind and allows you to sleep better at night.
Once the cash starts flowing in from increased sales and reduced costs, put some aside each month to start building an emergency buffer.
5. Seek help from financial experts
Managing cash flow is a skill but one that can be learned. Meet with a trusted accountant or experienced business advisor to get advice if you’re struggling. There are many workshops and courses you can attend to improve your financial skills and gain experience.
Don’t wait if you have cash flow issues, do something about it early on so you can turn things around before you end up going out of business.
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