Good cash flow management is vital to ensuring your business survives, but not everyone understands how to manage it or even what it is. That’s very likely what makes it a leading cause of stress to small business owners. A Capital One study found that 42% of small business owners agree cash flow management is a significant concern for them.
Cash flow is the movement of money in and out of your business. It’s based on the amount of money you make minus the amount you spend. A positive cash flow will mean you’re bringing in more than you’re spending. A negative cash flow can mean you aren’t bringing in enough money to cover your expenses. Your company may run into problems by not charging enough for goods or services, having chronically late clients in paying, growing too quickly, or just spending too much money.
Cash flow can differ throughout the year, depending on sales cycles or whether you’ve made a significant business purchase. Here are a few strategies you can use to gain control over your cash flow.
Understand your profitability
Managing your cash flow is excellent, but it won’t help you if your business isn’t profitable. Take a look at your products and services to determine how much money they bring compared to how much you spend to offer them. Find any ineffectiveness in your processes and change or get rid of them if possible. Understand where your business is most profitable and where you have cost overruns.
The basis of good cash flow management is ensuring you offer profitable goods and services that help you obtain your goals while reducing those that negatively affect your finances. You may have to increase your prices to reflect the cost of the goods you sell or stop selling lower-margin products or services.
Similarly, have a look at your clients. Are there some that you are undercharging or spending way too much time and energy on? Can you increase their fees to align with the work you are doing or find higher-paying clients?
Write a cash flow forecast
Your cash flow forecast can predict how your business will perform financially over a set period. It’s a great idea to have a cash flow forecast for a year, broken down into quarters and months.
The projection considers your revenue and expenses during these periods and helps you determine out how much you need to make in that period to cover your costs. It can also help you anticipate any upcoming cash flow issues, such as slower periods that may mean you will have to cut back on expenses. If you have any upcoming big-ticket items you’ll need to buy or plans to expand your business, and these can be included in the forecast.
Regularly check your actual cash position against your projection to see how you’re doing and if you need to make any adjustments.
Use technology to keep on track
There are plenty of software solutions available to help you gain insight into your company’s cash flow. They can help you make projections and get a real-time view of how your business is tracking. This information can then be shared among other company managers. Meaning everyone has an idea of how the company is doing financially and where strategies should be put in place or changed to get you back on track.
Additionally, project management software and invoicing software can encourage easier, faster payment from customers and help keep projects on budget. This can also improve your cash flow.
Final thoughts
Many business owners will find cash flow management stressful. Still, with a bit of information and planning, you can have better insights into your company’s financial situation by using the right tools. Those insights will help you make better decisions for your business and gain control over your cash flow. Get in touch with us today, and let us discuss what will work best for you. Join the Conversation…