Cash flow management is known as the process of monitoring how much money is coming in and going out of your business. Properly analyzing cash inflow and outflow statement patterns and changes empowers you to optimize the complete process and grow your business in the right direction. It also helps you forecast the future cash balance of a company and identify how much money it needs to run correctly and cover debts.
Importance of Cash Flow Management
It is an inevitable fact that the majority of businesses fail because of poor cash flow management. If a company keeps spending more than what it earns, it has a cash flow problem and won’t be able to stay alive.
In any kind of business, smart small-business owners need to stay on top of their cash flow. Are you earning more than you’re spending? Or the reverse? This information is crucial to come up with a business plan. It is essential to delay the expenditure of payment as long as possible while inspiring anyone who owes you money to pay it back as soon as possible.
Key Approaches for Cash Flow:
The three pillars for better cash flow management include:
- Expand your Accounts receivable: What customers and clients owe you
- Control your Accounts payable: What you owe your suppliers
- Survive Shortfalls: Situations where you lack the cash to pay your bills
All strategies or tricks for effective cash flow management would fall under these three broad categories. Thus, you must first determine the current picture with regards to these above three elements, and then strategize to improve. Here are some tips to effectively manage your cash flow:
1. Get an estimate of your break Break-Even Point:
This doesn’t directly help to better your cash flow, but this would help you get your goals straight. Having a clear target makes you come up with an acclimatized business plan and determine your priorities. This would also help you get an idea of how much your expenditures should be in order to start making profits sooner.
2. Cut Costs
As straightforward it sounds, it is imperative for you to recognize areas where you can minimize your outflows of cash. Can you reduce your utilities, payroll, or rent? Are you investing money on services or subscriptions that you’re not using or insurance you no longer need? Consider refinancing your outstanding loans at better interest rates. Even small steps taken in this regard finally pay huge dividends in the end.
3. Make money from your assets
If you have any useless types of equipment, consider selling them to cash in on them. This would help to make use of your inventory, which was anyway getting obsolete.
4. Maintain Cash Reserve
Your business’s survival may rely on how you get through the shortfalls as every business falls through operating cash flow. If you start with keeping some cash in your bank account, it will be easier to focus on cash flow, and you won’t stress about these situations.
5. Get a Business Line of Credit
Business credit is a good insurance policy against any cash flow problems. This would also ensure your survival through shortfalls. You may be able to get secured loans for a percentage of your accounts receivable or inventory.
6. Delay payables to your vendors
Get the best deal you can on payments. Get to know how late you can repay your vendors without risking late fees or harming your relationship with those vendors. This keeps the cash in your account and out of your vendors until it absolutely must be there.
7. Make use of Technology
Keep cash flow statements in the cloud at sites such as Dropbox or OneDrive or Google Sheets so you can access them from anywhere and use professional accounting software. Also, make sure you keep your files secure, even if you must roll your storage and your accounting software into one web-based package.
Staying on top of your cash flow statement is the core point of your business to get success. Don’t let a few cash flow missteps put you in a money crisis. If your cash flow stays positive, your business can survive turbulent waters. All it takes are a few smart and innovative moves to keep your company in the black.