No business owner, notably a small business owner, is immune to cash flow concerns. As consumer demand rises, company owners face increased operational costs. As a result, improving the cash flow is more crucial than ever.
Small companies are the driving force behind India’s growth, and sensible cash flow management strategies ensure such firms’ durability and sustainability. Whether you wish to develop operations, acquire cutting-edge technology, or simply meet the day-to-day maintenance expenses, improving the cash flows is essential for a small business.
In an Intuit survey, over 61% of small businesses worldwide struggle from cash flow challenges, and nearly a third are unable to pay their costs, including interest payments on pending business loans. Yet sceptical? Take a look at this. According to well-referenced US Bank research, 82% of small firms fail due to cashflow issues. When you don’t have enough cash, you can’t pay your employees, keep your products stocked, or keep the lights on. There are various ways that small business owners may use for improving the cash flow of their business. Here are some examples of them.
Small firms must focus on more than simply profitability to exist, much alone prosper, such as sustaining their cash-conversion cycles. The secret to successful business growth is improving cash flow management & ensuring that appropriate working capital and operational money are always accessible. The following tips will help you better understand what cash flow is and how to improve it in small businesses.
What is Cash flow?
The net amount of money coming into and leaving a company is called cash flow.
Businesses often measure cash flow on a weekly, monthly, or quarterly basis. The capacity of a company to earn positive cash flow via routine business activities determines the profitability of that business. Revenues from the sale of products or services as well as income from investments are two types of money that enter a business, or inflows. Expenses and debt repayments make up a company’s outflow of cash or cash from operations.
The two main categories of cash flows are as follows:
- Positive cash flow: When the money coming into your firm from sales, accounts receivable etc is greater than the money going out through accounts payable, regular costs, staff wages, etc., you have positive cash flow.
- Negative cash flow: It occurs when cash outflow exceeds cash inflow. It usually spells doom for a company, but there are actions you can take to correct the negative cash flow situation and return to the positive cash flow zone. One fast approach is to reduce company expenditures; we’ll go over this in more detail later. These vital figures show you how much money is coming in and how much is leaving your company.
Profit Doesn’t Always Mean Good Cash Flow
You can’t merely glance at your profit and loss statement (P&L) to compute your cash flow. Many other financial variables, including accounts receivable, inventory, accounts payable, capital expenditures, and taxation, play a role in calculating the cash flow.
Focusing intently on each of these sources of cash—along with your profit or loss—is essential for effective cash-flow management. According to accounting rules, profit is only defined as revenue minus expenses. But a savvy company owner knows that understanding if you made a profit is separate from understanding what happened to your money.
You Can’t Regulate What You Don’t Measure
The initial stage estimates how much working capital a company needs to function. You must react to questions like:
- How much inventory do I need to have on hand?
- How many bills are past due?
- How much money is locked up in work-in-progress?
- How long does it take from paying our suppliers for goods to collecting money from customers?
Your bookkeeper, accountant, accounting software, and even spreadsheets can assist you in forecasting cash inflows and outflows over time. It is critical to begin measuring the essential indicators right once.
Suggestions for Improving the Cash Flow
Now that you understand the fundamentals of cash flow, let’s look at how you might work on improving the cash flow and managing your cash flow more successfully. Here are some ideas/tips for improving the cash flow.
Keep a separate business Account
Since small businesses typically rely on individual savings, some business expenditures may be paid from a personal account. On the other hand, a separate business bank account allows you to manage your business spending, obtain business loans, and use overdraft capabilities. These account summaries help in analysing where money is going and how much cash you expect to have coming in over the next several months.
Don’t Buy, Lease
Consider both options, taking into account the present value of the down payment and the lease payments made over time. Leasing eliminates cash withdrawals all at once, and this money can then be invested for alternative returns. Anything-as-a-Service allows you to purchase hardware and services online on a pay-as-you-go, on-demand, or subscription basis. Leasing allows you to pay in tiny instalments, which helps in improving the cash flow. An extra benefit is that leasing payments are deductible as a business cost on your taxes.
Since leasing materials, equipment, & real estate is more expensive than purchasing a new one, it may appear paradoxical to a person solely concerned with the bottom, or your revenue after costs are cleared. However, you’ll need to keep a cash flow for day-to-day operations.
Enhance Your Inventory
Perform an inventory check. Make a list of everything you buy that isn’t selling as quickly as your other offerings. They need a significant amount of cash and may impact your cash flow. Get rid of it instead of purchasing what isn’t selling, even if that means doing so at a loss. It’s difficult to walk away from items you like, thinking that demand would miraculously increase sometime, but this nearly never occurs. Be objective rather than passionate.
Send Invoices Right Away
As the proprietor of a small business, you wind yourself wearing several hats. You are selling a product or offering a service in one moment. You’re charging clients and interviewing potential staff the next thing you know. Keeping track of everything is difficult.
You’ll want your invoices to be easy to understand with clear language. The due date should be specified in several places (ideally in bold), including at the top of the invoice and on the payment slip at the bottom. Include specific information about the payment methods that are accepted. If you impose late fees, ensure this information is included as well. Invoicing frequently goes by the wayside, and cash flow suffers as a result. The longer it takes to submit a bill, the longer it takes to get paid. To avoid late payments, submit an invoice promptly after making a sale.
Make Use of Electronic Payments
Consider including digital payment alternatives alongside checks and bank transfers. If you pay electronically, you can postpone payments until the morning of the due date. This time purchase helps in improving the cash flow. You may also utilise a business credit card because some of them have a grace period that lasts 21 days. You might even receive your money back. But don’t go into too much debt.
Negotiate With Your Vendors
Learning the skill of negotiating is an essential component of running a business and may help you persuade your suppliers to give you a better price. Make early payments to vendors if they are ready to provide you with a discount in exchange. Propose flexible payment alternatives instead of opting for the lowest price to try to align the payables to your receivables.
Check for any early-payment discounts as well. It is beneficial to postpone payments for as long as possible, as long as you do not incur late payment costs. Negotiating better payment conditions might be aided by relationship management.
Increase the prices
Many company owners are afraid of raising their rates. They are concerned that it will result in lower sales. However, it is OK to experiment with a price to locate the sweet spot—how far are buyers ready to go? You’ll never know unless you take a chance.
Companies are paying higher prices to get merchandise and employees into their stores and companies. Cash flow drops when operating costs rise. However, businesses are not required to bear this expense alone. They can boost their pricing to safeguard their profit margins. Consumers appear to be prepared to accept price rises for the time being. If you’re straightforward and honest about why you’re raising costs and by how much, then you should be able to keep your customers.
Investing and Growing Your Money
After paying for immediate company needs, such as interest payments on MSME loans, put the leftover funds in interest-earning accounts. Certificates of Deposit (CDs) and money market accounts are two more attractive possibilities. Avoid placing your funds into long-term deposits, especially if they have lock-in periods because early redemption will cost you money.
High-Interest Savings Accounts are an option. The finest high-yield savings accounts provide interest rates that are more than 17 times greater than the national average, which means you’ll earn more on your money.
Perform Customer Credit Checks
If a consumer refuses to pay you in cash, run a credit check on them—especially before you sign them up. If you offer credit, run a thorough credit check on each of your new clients, especially if they are big firms. Keep track of late-paying clients and negotiate penalty conditions with them. Increase your cash inflows by demanding deposits or advance payments from your consumers at the time of order placing. If the client has bad credit, you may confidently predict that you will not get paid on time.
As much as you want to make the transaction, late payments may harm your company’s cash flow. If you decide to proceed with a sale despite having credit issues, ensure that you establish a high-interest rate.
A healthy cash flow is the outcome of businesses that function smoothly and efficiently. While applying any or all of the ten measures outlined above should assist you in improving the cash flow of your company, you’ll also want to ensure that you’re making the proper judgements in terms of marketing, customer service, product development, and new client acquisition. If you know how much money is coming in and going out, you’ll be able to discover strategies to cut spending and save more money.
Improving cash flow has more advantages than simply being able to pay your staff and purchase products and services. It is the gasoline that keeps your firm running and saves it from failing due to unanticipated situations.
That is why it is vital to regularly evaluate and update your business strategy to ensure you anticipate trends and difficulties before they damage your profitability. These are by no means all-inclusive. You may choose any of the choices that best fit your company’s needs. Follow the advice above, and you’ll be well on your way to improving the cash flow and operations of your business.
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- What is cash flow?
Ans – Cash flow is the net amount of money coming into and leaving a company. The capacity of a company to earn positive cash flow via routine business activities determines the profitability of that business.
- What are some common causes of cash flow problems for small businesses?
Ans – Some of the most common causes of cash flow problems for small businesses include increased operating costs, acquisitions, and technology investments.
- What are some advantages of improving cash flow?
Ans – Improving the cash flow can save a business from failing due to unanticipated situations, such as when funds run out. Additionally, it can improve a company’s profitability by allowing it to purchase products and services more easily.