How Small Businesses Can Manage Their Cash Flow
Jun 17, 2022 | Ankit Autade
First of all defining small businesses is where this article should begin with, based on the revenue generated at anything less than $40 million annually and number of employees being less than 1500 depending upon the businesses according to the SBA or Census Bureau. Having a positive cash flow is more important for these SB, which means more money coming in rather than leaving the business. Profit always does not mean good cash flow; it depends upon many factors such as inventory, capital expenditures, accounts receivable, accounts payable and taxation.
Effective cash flow management focuses on the above factors and the breakthrough point of when the business will become profitable is important just so that one has an early goal to achieve and ready-made targets for projection of future cash flows. Revenue just measures the money one business is making whereas cash flow measures both the coming in of money as well as going out of money. Managing this cash flow is the most important step in making one’s business successful. “Cash is King” is the most common expression associated with businesses and for the cash to serve you below are 5 simple ways a business can start practicing to fix cash flow problems
1) Short-Term Financing
To make emergency purchases or to fulfill the gap between the payables and receivables line of credit or short term loans from banks can be helpful depending upon the requirement of one’s business.
2) Long-Term Financing or Capital Expenditures
Equipment or real estates or larger assets should be looked over as an investment which should be paid by long term loans and not the working capital(the money available to run day to day activities) as it can be needed at any point of time and the business should never run out of working capital. The interest rate would not be a major setback in that case.
3) Speed Up Recovery Of Receivables
The billing and the invoices should be done as soon as the goods are delivered and not waiting until the end of the month. Keeping up with these practices can help with the timely flow of cash flow. Detailed invoices and for larger orders some deposit or some percentage of the total amount can be asked for at different stages so that it helps with keeping up with the costs. And also adding some payment link or different ways to pay which are mentioned on the invoice which can be helpful.
4) Liquidate Cash Tied Up With Assets
Try selling out the excessive inventory which is not required and is worthless and might change due to different customer needs or try calculating inventory turnover. The equipment which is not in use for a long time should also be tried to sell off because it might just take up space and not help with generating any kind of inflow of money.
5) Delay Your Payables
Try delaying your payables to vendors unless there are certain incentives that can be earned. This helps the business to keep more cash in your account. Figuring out how late can the payments be made by avoiding the late fees and hampering the relationship with the vendor.
How do you keep up with the cash flow?
1) Stay on top of bookkeeping
Bookkeeping is one of the most undermined tasks when it comes to businesses. One has to keep up with the bookkeeping to keep in check the transactions and the flow of money either departing or coming in. And to follow the other steps bookkeeping is the 1st step to be followed.
2) Generate cash flow statements
The cash flow statements need to be generated by the accountant and if the business does not have one the person in charge should do it himself. Using software or excel spreadsheets it gets easier to manage these cash flow statements which is really necessary to know how the business is running on paper and in reality.
3) Analyze your cash flow
Taking the information from the cash flow statements the analysis is important to understand the movement of the money in small businesses. Also it can help with the cash flow projections which can help predict the future of the financial condition of the business with respect to decisions taken in the present.
4) Figure out whether you need to increase cash flow If there is not enough cash to meet the monthly needs of the business and line of credit has to be used regularly to meet up with them, it is one of the signs which tell you about figuring out a way to increase the cash flow. Freeing up more cash is a necessary solution to this problem.
5) Cut spending where you need to
Unstrategic expenses can lead to unnecessary expenses and overspending of cash. For managing cash flow cost cutting is necessary to be in a positive cash flow. There needs to be a strategic planning of where to spend money and what benefits does one get out of it with respect to time.
6) Speed up your accounts receivable
The invoices should have a date up of late fees mentioned clearly so as to keep the clients or people concerned from not taking up much time before sending in the money and also discounts to be given for early payments. Amounts to be received should process sooner and not by the
end of the month which in turn keeps the cash flow in check. The sooner these transactions happen the sooner there is a flow of cash.
7) Rinse and repeat
Analyzing this whole process of cash flow management should be regularly done in the back office. This gives scope of finding ways to increase the cash flow at different stages and window for minimizing the negative cash flow. It also gives a chance to remain flexible with the market when in need.
Cash flow statements
A Cash flow statement is one of the essentials that is needed to run a business. It basically divides into 3 categories -
1) Cash flows from Operations
2) Cash flows from Investing
3) Cash flows from Financing
These categories together work up to one functionality that is to watch where has the cash moved over a set period of time. Below is an example of a SME which uses a CF statement to understand the financial health of their business over a certain period of time.
(values in red are to be subtracted from values in black)
Operating Activities consist of primary revenue generating activities as well as non investments or funding practices, i.e any cash flows between current assets and current liabilities.
Investing Activities consist of all capital balances resulting from selling and buying of properties and other transactions that are not found in cash equivalents.
Financing Activities consist of all the cash flows that result in changes of the businesses contributed equity capital or borrowings, i.e bonds,
stocks and dividends.
Best Practices For Managing A Healthy Cash Flow:
1) Identify Business Risks & Prepare In Advance
Risk analysis is important for any business, thoughts like bigger orders, larger bills, enough inventory and many more should be identified and worked upon in advance. Because it is difficult to predict which difficulty will strike when so by preparing spreadsheets with regards to forecasting cash flows and other requirements should be made just in case. One cannot completely future proof their business but can try to identify as many problems that can occur and work out the solutions towards it.
2) Create A Separate Bank Account For Your Business
One of the common mistakes business owners make is to get away with the bank work and use their personal accounts for the business and their startups. One should avoid mixing these accounts to keep them in order and have a clear outlook of different transactions made and the flow of cash. It can help manage the cash flow in a much standardized manner. It also helps in better forecasting the expenses and the earnings.
3) Monitor Your Inventory Efficiently
Inventory is one of the most important parts of the business which can either tie up your working capital or can ease up your cash for different strategies. Inventory has to be monitored carefully to avoid soaking up of the working capital completely and also to keep in check the required items are available at all times. It should be kept lean and simple to avoid unproductivity and unprofitability.
4) Always Keep Buffer Money
Business can require money at any point of time in very crucial
situations and to have some cash onboard is always a healthy way to prepare for such situations. Breakeven point helps to know what is the spending necessary for different working capitals so to have a line of credit or extra funds can certainly be helpful in tough times.
5) Implement Better System To Manage Cash Flow
Implementation of better invoice systems and better payments is essential practice for the management of a healthy cash flow. Sending invoices as soon as the delivery is made and not waiting until the end of the month. For bigger orders splitting up the payments for different stages of the order. Putting up efficient systems of accounting or spreadsheets which help in smooth running of the finances.
6) Cut Costs, Control Cash Outflows
Staying on top of the expenses is a big factor which can lead to a healthy management of cash flows. Cutting costs and not ignoring them once things are profitable is important as well. Cash outflow will increase with the increase in business so it is necessary to keep it in check and maintain it properly for more efficiency.
7) Keep Your Cash Growing
Keeping the cash in accounts which can earn you good interests is profitable. Not to keep them in long term deposits which might charge you a penalty for taking them out early, keeping them in flexible accounts and penalty free accounts may be beneficial. Bulk of funds should be kept in higher interest return accounts for benefitting with them by not moving them out for a definite period of time. Investing in the market with the funds which are not required may turn out to be profitable as well.
8) Do not focus on profit, focus on cash flow
Purely focusing on profits may run out the business in a short period of
time. The main focus should be on positive cash flow to ensure the survival of the business. "Sir Richard Branson, business magnate, investor, author and philanthropist says “Never take your eyes off the cash flow because it’s the lifeblood of business.” It is more important to keep an eye on the cash flow forecast and make it work rather than running behind profits.
Cash flow management is an important topic that all SMEs should be aware of, which will not only help them survive but will also help them walk in the right path towards making their businesses bigger and better. As mentioned time and time again that “Knowledge is power” it is one of the simplest quotes that can turn out to be the vital key to success in all these businesses.
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