MONEY makes the world go around. It’s an old adage, perhaps, but a true one nonetheless. When it comes to your business, no matter the size, managing the incomings and outgoings is absolutely imperative for survival and success but it’s something so few of us are innately equipped to deal with. And that’s where we come in.
What does cash flow mean for businesses?
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The first thing to consider is the difference between cash flow and profit. You see, whereas profit refers to the final total you’re left with after all expenses have been taken into account and reflects the bigger picture, cash flow is all about the nitty gritty – the daily operations, taxes, inventory, wages and general operating costs.
Inflow is the money entering the business and outflow is the money leaving it and it’s up to you to ensure the former outweighs the latter. With enough cash inflow, you’ll achieve a positive cash flow, which means liquid assets and increasing. Negative cash flow, meanwhile, is something best avoided, though you can always consider additional funding to help you cover any unexpected expenses or costs.
The best case scenario, however, is a business where cash flow is managed so that you are always in the black and that requires some management.
Why is it important to manage your business’s cash flow properly?
Simply put, poor cash flow management is one of the main reasons small businesses fail. If your ongoings and outgoings are under control you will make more informed and better decisions and will have a better understanding of how your money is being used.
Cash flow is, ultimately, what allows you to cover your debts, negotiate larger loans, cultivate and more valuable business and (perhaps most importantly of all in this market) expand. Because if you are in negative cash flow you are not going to be able to seize opportunities when they present themselves to you.
How to better manage your cash flow
Budgets – Set budgets as barriers that prevent you from dipping over the edge into negative cash flow. For a business that has expansion in its sights, budgeting can seem counterproductive but it’s always going to benefit you in the long term.
Records – Keep meticulous records of all your income and spending. The only way you’re going to learn from your mistakes and properly manage your cash flow is to make a note of them, after all.
Payments – Always ask for prompt payments. This can mean either asking for payment upfront using point of sale payments or simply invoicing customers or clients as soon as possible. Generally speaking, invoices are given 30 days to clear so you want to get them filed immediately.
Analysis – Analyse your records using accountancy practices and machine learning software.
Reminders – Nobody likes begging for money but sometimes you are going to have to send late payment reminders to those who have neglected to pay for products or services rendered.
