Your business’s cash flow is akin to its circulatory system. The money that comes in through revenue sources goes through different parts of your business to keep it going. Insufficient cash flow leads to your inability to pay payroll, replenish inventory, or pursue marketing campaigns. That is why cash flow management is crucial. Consistent cash flow allows you to better manage your business and its expansion.
Despite that, many businesses struggle with cash flow management – especially among small business owners. To help you, here are some tips for managing small business cash flow.
Cash flow basics: what is positive and negative cash flows?
Before discussing how to manage cash flow, it’s best to understand the definition of cash flow first. In simple terms, ‘cash flow’ is the ‘flow of funds into and out of your business. Usually, a company compiles cash flow weekly, monthly, or quarterly, depending on its financial situation. Broadly speaking, there are two types of cash flows, namely:
- Positive cash flow: When the cash coming into your business is more than the money going out of your business.
- Negative cash flow: The cash going out from your business is greater than the money coming into your business. This is generally seen as a problem for businesses – especially when you do not have cash reserves. However, you can fix it by reducing business expenses.
Keep in mind that cash flow is different from profit. Businesses with enormous profitability do not necessarily mean that it has good cash flow, and vice versa. That means your cash flow statement is different from the profit and loss statement (P&L). The cash flow statement covers many business elements, including capital expenditures, accounts receivable, inventory, and taxation.
Best practices for managing cash flow
Identify business risks & prepare in advance
In running a business, you’ll most likely face many risks. You may potentially encounter major issues that jeopardize future business continuity. Recognizing and analyzing potential threats is critical in cash flow management. This includes planning how you would avoid, mitigate, or resolve those risks. When the COVID-19 pandemic ravaged the globe in 2020, many businesses were severely affected following the lockdowns. As the economy recovers, new issues arose: supply chain disruptions, food shortages, materials shortages, and inflation among others. Businesses involved in import and export face the challenge of fluctuating and falling currency values. Learning from these events, always plan your business expenses and cash reserves accordingly.
Create a separate bank account for your business
One of the most common mistakes many business owners make is not separating business accounts from personal funds. Small business owners frequently do this under the guise of making capital management easier. However, this can disrupt the stability of cash flows because the in-and-out flow is no longer clear. You also find it difficult to track which funds are privately owned and which ones are business funds.
Monitor your inventory efficiently
Inventory is one vital aspect that you must include in the cash flow statement. Without an adequate inventory, you may face challenges in fulfilling customer orders. The orders could snowball into a bigger problem. Knowing your inventory levels as accurately as possible allows you to best manage the orders for those materials. If the inventory is stock in itself, you would be able to manage and monitor fast-moving items. You may also notice consumer patterns and trends. This way you could maximize the returns on your inventory.
Always keep cash reserves
Businesses without cash reserves may find themselves in trouble should sudden expenses arise. Cash reserves can fill the gap between the fulfilment of a customer’s order and receiving the payment for that fulfilment. Some experts recommend that SMEs need to have at least three months’ worth of cash in reserve. When businesses have to tap into this reserve, they would repay the amount used.
Implement a better system to manage cash flow
Many businesses put off sending invoices to their consumers. Some don’t even realize how much they owe their providers. They will eventually forget the bill, although this behaviour can impede financial flow.
To avoid a negative cash flow, you need immediately implement a better strategy for managing business cash flow. There is no need for a complex system; you may record all aspects of cash flow using simple and free tools such as Excel or Spreadsheet.
Besides recording the sum owed or owing, you need to record the credit terms. During tough times, you may want to stretch the credit terms as long as possible to ensure sufficient cash flow. You’re not the only one: your customers will do the same. If you are giving a credit term, make sure you balance it with what you’re receiving from your suppliers.
Reduce your cash outflow
Suppose you notice signs that your cash flow is deteriorating. Expense reduction is the quickest way to fix the problem. Write down all your expenses and then decide which expenses you should prioritize and which ones should be eliminated. You may need to revisit your business plan and marketing plan. Focusing your efforts on securing low-hanging fruits is crucial. In certain situations, you may consider looking for financing or funding.
Leverage from short-term financing when needed
You can use short-term funding to leverage your small business if necessary. There are numerous short-term funding options available at the moment. Select a reputable platform like Funding Societies, Southeast Asia’s most significant SME digital financing and debt investment platform. We specialize in short-term financing for SMEs, funded by individual and institutional investors.
Managing your cash flow is critical to ensuring you can focus on your business rather than its accounting. Take small steps to ensure your business is ready for unexpected ups and downs that can be difficult to estimate.