Managing your cash flow is one of the most important aspects of running a small business. However, if you don’t have a good understanding of what it is and how to manage it, you’ll struggle to make ends meet.
Hence, not being able to manage cash flow is one of the biggest mistakes startups make.
What is Cash Flow?
Cash flow is the movement of money in and out of your business. You need to be able to track cash flowing in and out so you can make adjustments as needed or plan for future expenses.
If you have too much cash coming in, then you can make plans for investing that money back into your company.
If you have too much going out, then you can try to cut down on expenses so that there’s more cash available for other things.
What Does It Mean To Manage Cash Flow?
Managing cash flow means knowing how much money is coming in and going out so that you can adjust accordingly.
If there are too many checks going out than coming in, then something needs to change. Perhaps customers aren’t paying their invoices on time or maybe they’re not paying at all.
Maybe there’s too much overhead being paid right now because sales aren’t keeping up with costs. Whatever the case may be, managing your cash flow means identifying problems early on so that they don’t become bigger issues.
7 Effective Tips to Manage Cash Flow
1. Have an Emergency Cash Reserve
Your emergency cash reserve is like a savings account for your business. When unexpected financial issues come up, it’s important to have funds set aside to cover these costs without putting them on a credit card or taking out loans.
Having an emergency fund is a good habit for anyone, but it’s especially important for small business owners.
2. Set Invoice Timelines and Terms
Invoice timelines and terms should be clearly stated in all contracts with clients or customers. This will help ensure you receive payments in a timely manner — and avoid disputes over late payments later on down the road.
Your contract should include payment deadlines, reminders that you’ll send out at those times (if they’re missed) as well as late payment fees.
3. Get Paid on Time
You can’t manage cash flow if you’re not getting paid on time. Consider offering incentives to customers who pay their invoices in a timely manner, such as discounts.
You can also use online invoicing software to send automatic payment reminders. Also, including one-click payment options makes it easier for clients to pay.
4. Don’t Rush to Clear Your Payments
If you can hold off paying bills for 30 days without penalty, then do it. Use the extra time to sell your goods or services and get paid — so you can pay down debt early if it means avoiding interest or late fees.
Leverage digital banking to set up recurring expenses on the final day they are due. Still, don’t wait too long — being late on payments could affect credit scores and hurt your reputation with vendors.
5. Cut Your Costs
If you’re not making a profit, the first step is to cut your costs. You can do this by downsizing your physical space, or reducing inventory levels or staffing levels.
You might also consider taking on more work and asking for partial payment upfront before starting a job.
6. Prioritize Cash Flow Over Profit
Most people believe that the key to entrepreneurship is profit only. However, it is all about how you manage your cash flow.
Always compare your earnings to your break-even point. If you earn more than that, but money is still tight, you most likely have an issue with your accounts payable, receivable, or shortfalls.
7. Assign Someone to Monitor Your Cash Flow
The best way to manage your cash flow is by having someone (or several people) who are responsible for monitoring it daily, weekly, and monthly.
This person should be tracking all incoming and outgoing payments, as well as keeping a close eye on accounts payable so that bills are paid on time. If you’re doing this yourself, consider hiring an accountant or bookkeeper who can help you keep track of things.
So how can you manage cash flow for your business? First, you should know where your money is coming from and going.
Keep track of all income and outgoings. Set personal savings targets, and make sure you meet them. Think about the bigger picture when spending money.
Try to ensure that you avoid accruing any credit card debt – the interest charged will eat up your profits quickly. Remember never to dip into capital to cover shortfalls, as this will greatly affect your company’s liquidity.