Cash flow is basically the lifeblood of any business and its operations, as the United States Small Business Association (also known as the SBA) states. But what does that actually mean?
It’s an umbrella term that refers to the amount of cash and cash-like assets that are flowing both in and out of your business. As such you may include operating expenses and incoming sales in this category.
So, really, managing your cash flow appropriately is imperative to running a successful business. It can affect your ability to make ends meet and pay your employees. Furthermore, the smaller the business the more it feels like cash flow can be on shaky grounds. So what can you do to ensure that your cash flow is positive?
Today we’re going to go over 5 cash flow management tips to help new business owners on their way to wealth and success.
1. Understand How Cash Flow Affects Your Business
Though many people believe that cash flow and profitability go hand in hand, nothing could be further from the truth. If you operate on this principle then you’re starting your business based on false assumptions, meaning you could land yourself in deep trouble if you’re not careful.
If you have a positive cash flow it means you have enough liquid capital to cover daily expenses. Profitability, on the other hand, means that your net income is greater than your expenses over a certain period of time. So your sales and other sources of revenue exceed your expenses.
Let us assume that you have a customer that is late with a payment. Your cash flow can suffer from this, but that doesn’t immediately mean that your profits drop. If, however, an issue like this persists then, yes, your profitability may be put in danger if you’re unable to pay your suppliers or your employees.
2. Make Monthly Projections
Every serious business owner will scrutinize their monthly expenses and revenues. But if you want to be a truly great business owner then you have to take it one step further by making monthly projections.
You can use online tools, of course, but the easiest way is to just open up a spreadsheet. Look at customers’ payment history, vendor practices as well as future expenses and obligations.
What’s the amount of cash you have on hand? What about the amount you’re expecting to receive? And don’t forget to subtract invoices, fees, and taxes!
Once you put together all this data you’ll be able to catch issues way ahead of the curve, giving you enough time to come up with a game plan.
3. Remember That Timing Is Everything
There will be times when you’ll need to tighten your belt. Other times you may be able to relax a little bit. Living in a constant state of stress won’t do you or your business any good, so you should learn to time your cash flow accordingly.
How should you go about this? Well, you can make sure that your client invoices come in at least one week before your credit card payment is due. Imagine a world in which all of these expenses are reversed, it would be terrifying!
Your cash flow should fluctuate in a very particular pattern but before you can set one you must first become well acquainted with all your important due dates.
4. Be Innovative
If you’re having cash problem you may feel the need to increase prices or spend more money on complicated solutions. Before you make such decisions take a step back and look at your business overall. What can you do to incentivize your clients to make payments on time? Are you having issues because of bad timing?
Have you thought of regulating and automating invoices? Cancellation or hold fees might be enough to nudge your clients without damaging your business partnership. Even better, you could come up with a rewards system for early or on-time payments. That way you’ll incentivize even the tardiest of clients.
5. Start Small and Save As You Go
New business owners often get too excited about their new ventures. As such they could overspend right out the gate, especially on equipment and software. It’s best to hold back on such purchases and evolve your business gradually.
Not to mention that money could be put to better use, especially early on. You should consider putting it in a separate, emergency fund. If you’re running into trouble you’ll be thankful for the extra cash to dip in to without having to ask for a bank loan.
All in all, having detailed records and using a little bit of common sense can propel you towards success. Really, starting a business is neither astronomically complicated nor difficult. The difference between a successful business and a failing one, however, lies in whether or not you’ve got good cash flow management.