Cash flow is a vital aspect of running any business. It delivers clarity on exactly how much money is coming in and how much is going out on a weekly, monthly, and annual basis. Examining cash flow can help business owners discover where savings can be captured – and plan for a financially sustainable future.
Business owners who do not prioritize cash flow are more likely to encounter financial challenges. They might fall short of financial obligations, such as paying employees or buying necessary supplies, and may fail to predict shortfalls or incorrectly allocate resources.
For small businesses, especially startups, cash flow can be a balancing act. Between monitoring vendor payments, payroll, and monthly income, this responsibility may take some time to get right. These tips can help make overseeing your business’s cash flow easier, ultimately informing important business decisions.
Prepare a Cash Flow Budget
Just as budgets help us keep track of our personal finances, budgeting can help your business allocate funds efficiently and preserve profitability. Set up a realistic cash flow budget by projecting anticipated inflows and outflows over time. Inflows are the receipts from customers and other income from operations. Outflows could include items such as office supplies, building upgrades or repairs, payroll, and the numerous other expenses that come with running a business. Setting an expectation for what money is coming in and what is going out can help you identify when and where a shortfall may occur, and how to avoid any unwanted surprises.
Manage Future Inflow
Overseeing your business’s inflows is critical to its success. First off, set expectations for when and how clients make payments. Business owners can construct reliable processes for delivering invoices and communicating due dates. Further, they can implement a standard protocol to follow up on late accounts. Setting explicit expectations early on can help prevent confusion and late payments.
In addition, business owners can determine whether advance deposits, retainers, or subscription payments make sense for their line of business to boost or stabilize inflows.
As a business owner, you also need to keep an eye on where your business’s income is going. There are plenty of unavoidable expenses (such as paying employees or rent), but there are a few ways to capture savings here, too:
- Consider used equipment purchases– If the newest version isn’t absolutely necessary, used equipment can be a more cost-effective option.
- Repair capital equipment rather than replacing it– Why buy new, when you could fix what you already have? Keeping up on equipment maintenance can help business leaders direct money toward more pressing issues.
- Delay upgrades until they’re necessary– While upgrades can be important in some circumstances, they’re not always totally necessary. Identify where upgrades are needed most and hold off on the rest.
- Don’t pay until you have to– Unless there’s a reward for paying vendors early, don’t pay bills or installments until they’re due. This keeps your money in your account, delaying cash outflows until they’re absolutely necessary.
Open a Line of Credit Before You Need It
Fostering a connection with lenders is especially important for long-term success. Lenders are less likely to help you out if you only seek their assistance when your business desperately needs cash. They may be more open to providing financial support if you already have a strong relationship. To start this process, establish a line of credit before you actually need it.
Create a Cash Reserve “Buffer”
Set aside a small amount of profit each month to establish a safety net for you and your business. Once in place, cash reserves should not sit idle, but earn a small return. You can place the reserved money in interest-earning accounts.
Clarifying where money is coming from, where it’s going and how it’s allocated are the first steps to developing an effective cash flow strategy and ultimately improving profitability.