Small Business Brief


How to Manage Cash Flow in Business Effectively

About 67 percent of small business owners say managing cash flow is one of the biggest challenges they face. It’s easy to see why. Poor understanding of cash flow and the inability to manage cash flow effectively accounts for 82 percent of small business failures.  

Therefore, any entrepreneur who dreams of succeeding in business must stay on top of their cash flow. But how can you do so?

In this guide, we tell you how to go about managing your cash flow, so your business doesn’t struggle in today’s tough economy. Read on to learn more. 

The Basics of Cash Flow

Before we delve into cash flow management, it’s important to understand what cash flow means. Cash flow refers to the movement of money in and out of a business. Most businesses track cash flow on a weekly, monthly, and quarterly basis.

Cash flows can be categorized into two:

Positive Cash Flow

Positive cash flow occurs when the funds that enter into your business are more than the money leaving your business. This is the type of cash flow that you want to maintain at all times.

Negative Cash Flow 

Negative cash flow refers to a situation where the money leaving your business exceeds the incoming cash. When your business has a negative cash flow, it signifies trouble. 

The good news is that there are simple cash flow management and forecasting strategies you can adopt to get back into the positive zone. Of course, you can always elicit help from an expert in bookkeeping for business if you have challenges implementing these strategies. 

How to Manage Cash Flow in Your Business

The fact that you have cash flow issues doesn’t mean that your venture is doomed. Use these tips to reverse your fortunes within no time.

Monitor Cash Flow Regularly

The first step to managing your business cash flow is to track all your cash flow results each week or month. By doing so, you can determine if your leadership team is creating a positive cash flow or not.

Monitoring your cash flow can also help you create cash flow projections that you can use while making decisions about paying your current bills and expanding your business. Today, many online accounting tools make it easy for business owners to reconcile accounts and generate reports, among other things. 

Focus on Cutting Costs

What are your recurring weekly, monthly, or yearly expenses? List them and see where you can cut costs. Look for possible ways to reduce utilities, payroll, and rent.

Other costs you can cut include insurance that your business no longer needs and subscriptions you don’t use. If you can find ways to renegotiate the terms of leases and outstanding loans, do so. 

Collect Receivables Faster

Smart business owners look for ways of speeding up the processing and receipt of receivables. One way to do so is to make it easy for clients in distant locations to directly mail checks to your bank, so payments are processed more quickly.

You can also ask your clients to preauthorize payments and checks. This way, the bank can draw funds against the clients’ accounts at specific intervals.

Be sure to centralize all your business banking at a single bank, so it’s easier to get payments quickly.

Tighten Credit Requirements 

When your business is just starting out or starting to grow, you may opt to extend credit to your customers to get their business. Before you extend credit to a customer, you need to do your research. 

Find out if the customer can pay the bill on time. If the customer owns a business, find out whether the business is growing or struggling. If they have cash flow issues, you may want to think twice before extending any credits.

Consider accepting credit cards too. Sure, you’ll be charged a percentage for doing so, but it’s a safer way to ensure you’ll get your payments on time.

Increase Sales to Existing Customers

One way to get more cash is to sell more goods and services. But converting prospects into paying customers isn’t as easy as it sounds. Besides, it costs a lot more to gain new customers than it does to get your existing ones to give you more business.

To increase sales to your existing customers, analyze what products they’re buying more and why. This information can help you grow your profit margin. Also, more sales may mean more cash for your business.

That said, you need to beware of increasing account receivables instead of actual cash. If you’re only selling on credit, then more sales don’t necessarily mean more cash.

Offer Pricing Incentives  

One of the ways of boosting cash flow is to offer incentives to your customers, so they pay early. For instance, you can give discounts to customers who pay on time. Doing so will impact your profit margins, but it will also make available the cash you need to run your business operations.

If your suppliers and other creditors offer the same option, take advantage of it by paying your debts early. However, make sure that your early debt payment doesn’t lead to cash flow problems. Sometimes, it may be wiser to delay payment until you absolutely have to make payments.

Liquidate Any Cash Tied up With Business Assets

If you have any equipment you no longer need or inventory that’s almost obsolete, you may want to sell it for some quick cash. All that idle, outdated equipment is only taking up valuable space and tying up capital that you could use more productively.

Excess inventory can become worthless as the needs of your customers change, or new products are introduced in the market. Consider holding a sale to generate cash that can help benefit your business at the moment.

Get Control of Your Cash Flow

Regardless of the size of your business, it’s important to manage cash flow to survive in the current competitive business environment. With the tips we’ve shared in this guide, any business can stay on top of their cash flow problems and go on to succeed.

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