Keeping tight control of your cash flow is the most critical thing you can do when running a business, particularly when you are just starting.
All companies need cash to survive – and thrive – and meeting your financial obligations and having money to invest in opportunities is critical. But how do you manage your cash flow properly, and what are the best methods? We’ll reveal everything in our guide to managing cash flow – read on to find out everything you need to know.
What is cashflow?
Understanding cashflow is the first thing you need to do if you want to know how to manage it properly. Cashflow is the amount of money that comes in and goes out of our business, and you need to track it on your cash flow statement.
Positive cash flow is ideal, as it means you have more money coming into your business than leaving it. However, many startups will usually have a negative cash flow, which means more money is going out of your business. However, having a positive cash flow doesn’t necessarily say that you are turning a profit, as that money coming into your business could also include borrowing.
Working out a benchmark
So, when it comes to managing your cash flow, the first important step is to work out a reference point – or breakeven point. It’s this point where your business becomes profitable, and it’s an important goal to set for any new business. Not only will it help you achieve a level of safety for your business, but this benchmark or breakeven point is also a way of predicting your future cash flow and can help with your financial planning.
The general cash flow rules are relatively straightforward: know where you are now; see where you will be in six months. You can’t possibly know either of these if you don’t work out your breakeven point first.
Access to cash is vital for your business, so it’s important to ensure you are getting what you are due as quickly as possible. In most cases, this task involves getting money from clients and customers.
According to research, the average customer pays around two weeks late, so it’s easy to see where many of your problems might arise. Never invoice people and then leave them to it – remind them regularly and be proactive in chasing them up.
You can use automatic emails at regular intervals before the due date, and if that time passes with no payment, you can also consider imposing late payment fees. Don’t be afraid of chasing money – you have a right to be paid for your work, and the longer a customer leaves it, the more exposure your business will have to risk.
Of course, the money that goes out of your business also has an impact on your cash flow, And. In contrast, you should encourage your customers to pay immediately and avoid spending on your suppliers and other payables for as long as possible. Of course, we’re not suggesting missing deadlines, as that will attract fines. But by establishing longer credit terms – changing a 60-day payment to a 90-day, for example – you will find that your cash flow improves significantly.
If your business buys inventory, it’s vital to ensure that you are making sensible decisions about how you buy, store, and manage it. Don’t forget that everything you buy will impact your cash flow, as it ties up valuable money you can’t use to meet your financial obligations or invest in improvements.
The fundamental principle of inventory management is to order stock in quantities you can sell quickly without impacting your sales with out-of-stock issues. It’s a tricky balance to strike, but essential if you don’t want your cash tied up in inventory that lingers around your business for months.
At some point, all businesses will experience periods of a shortfall regarding cash flow. And one of the best ways of protecting against such occasions is to ensure that you have some reserves put aside – emergency savings if you like.
Of course, this cannot be easy to achieve when you are just starting. Still, you need to consider if you want to avoid potentially dangerous financial situations arising.
Borrowing money for your business is an excellent way of improving your cash flow, but bear in mind that you have to counter this by being able to turn a profit. Look at something like a cash flow loan if you need to fund a new marketing campaign that can pretty much guarantee results.
While these types of loans can be expensive if you don’t pay them back on time, the funding they deliver can help you achieve your goals far more quickly than saving a little each month and raising them yourself.
Small business loans are also exciting; as long as you research the market and get the lowest interest possible, they can provide you with vital funding to help you pay for your growth strategies.
Boost sales to current customers
Acquiring new customers is an expensive task, both regarding resources and money. So, if you want to increase sales to improve your cash flow, you are better off selling more to your current customers. Research suggests it is up to six times cheaper to sell to old clients, so it’s easy to see how much value it can bring to your business.
Look at what people buy, and spend time analyzing their shopping habits. Is there a way of enticing them back with discounts or better deals? However, one thing to bear is that you have to focus on getting money quickly – don’t allow your credit to build up, or it will cause further cashflow issues. The idea here is to make money, not increase your accounts receivable.
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