Cash flow is the life blood of any business – both big and small. Without proper cash flow management, you cannot perform the basic duties of a business, and your company will soon find itself in a world of trouble. To help you better manage your cash flow, here are some tips that will help not only manage, but improve the money coming into your company.
In a business, money runs on a two-way street – coming in, and going out. Hopefully, you have more entering your accounts than you do exiting them! But often times the amount of money you are owed and the amount of money you actually get paid do not line up. Meanwhile, while you are waiting on invoices to get paid, bills keep piling up. If you cannot get your cash flow under control in short order, your business can quickly come to a grinding halt.
What Is Cash Flow
Cash flow can be defined as the flow of money into – and out of – your business. There is positive cash flow (when revenue entering your business is more than the money exiting it) and negative (when you are spending more money than you are taking in).
Things that affect positive cash flow are sales, paid accounts receivable, and anything that earns your company money and is actually paid (being owed money does not count as cash flow until you actually receive payment). Negative cash flow, meanwhile is affected by bills, employee salaries, overhead, maintenance, new equipment, and so forth. Basically, anything that your company must spend money on.
Having a positive cash flow lets you pay your employees, order products to sell, and keep the lights on. It also affects your ability to actually earn a profit. For example, if you sell shoes at a shoe store and you run out of shoes, but have no cash to purchase more shoes to sell, you cannot continue operations, much less earn a profit!
How to Improve Cash Flow
Managing cash flow and improving cash flow can be a difficult task, but if you are diligent in your work, a balanced cash flow is achievable. And since it is the thing that keeps your business afloat, it should be every small business owner’s priority.
Increasing the amount of business you take in helps, but you often have to expend funds to do so, contributing to the overall problem. While business growth is definitely important, the following steps will also help to keep you on the right financial track.
Perhaps the most obvious way to improve cash flow is to increase your sales. The key point here to keep in mind is that it is easier (and cheaper) to sell more to existing consumers than it is to go out and find new ones. Earning new customers is essential to growing your business, certainly, but it also costs more money. If you can manage to earn more money from your existing customer base, you can increase sales and have more money coming into your business.
As noted earlier, being owed money and being paid money are two different things. Collecting on receivables due is pivotal for positive cash flow. To that end, making it easy for clients to pay you is essential. If you have a method for clients to pay directly to your account, great. Waiting for them to process and cut you a check slows down the influx of funds into your business. Make payments simple and you will see the positive effects on your cash flow.
Finally, creating a business budget – and sticking to it – is an excellent way to help manage your cash flow. Knowing what is coming in and what you can spend is the only way to balance the funds coming in and out of your business. This way you can prevent over-spending during lean times and make sure you have the cash necessary to carry on your business.