Cash flow management refers to tracking how much money your business makes (inflows), and how much money is spent (outflows). This may seem quite straightforward; in practice, it can be the small detail that makes the difference between business failure and business success.
In fact, about 82% of companies fail in their first couple of years as their liquidity runs too thin. Many small business owners have to spend their own money to keep the business afloat. Fortunately, there are many things you can do to improve your cash flow management and avoid a make-or-break moment for your business.
Types of Cash Flow
Overall, cash flow is quite straightforward with two main pillars: how much money you generate and how much money you spend. If you spend more than you earn, the cash flow is negative, so you will most likely have to take a loan or pour personal money into the business to stay up to date with all your costs.
If you earn more than you spend, then your cash flow is positive. However, to stay in the green, you should frequently monitor your cash flow management and know when it is the right time to improve it. Fortunately, there are many early signs indicating that your positive cash flow may turn negative. The most common ones are late or missed payments and you have to juggle funds around to cover the costs on time.
What Influences Cash Flow Management?
Depending on the type of business you have, there are many things that influence cash flow management. On the income side, having customers who make late payments may result in a negative cash flow for your business. Depending on the industry, running regular credit checks on your clients may help you identify the customers who may put your business at risk.
Businesses must cover a myriad of costs to stay afloat. Some examples include rent, utility bills, employee payroll and benefits, equipment (such as computers, accessories, and software), taxes or additional labor costs, account and legal services, and many more if your business expanded abroad, too.
Tips for Better Expenses Management
Visualize Your Expenses
Keeping track of all your expenses – no matter how large or small – is the first step to avoiding rainy days. Although it may seem simple, this could be challenging for any business. One of the main benefits of tracking your expenses accurately is that you can better predict your future budget and costs, and you’ll also be able to identify opportunities for investment.
It’s crucial that payroll is managed effectively in any company. Alongside property and capital costs, e.g., machinery, payroll is normally the biggest costs of most companies. Companies need to ensure that they are deducting and withholding the correct taxes, social security combinations etc. For companies with a global footprint, however small, there is added complexity all of which needs to be calculated within your business cash management
Invoicing Is a Priority
Businesses create invoices to make sure they get paid by their clients, so it’s a very important step. Invoicing also helps your company track all the revenues accurately while potentially acting as a legal document between your business and its clients.
Opt for High-Interest Saving Accounts
Change your regular savings account to a high-interest one, which typically earns many times the yield of the average saving account. In general, this type of account must be opened at another institution, not where you keep your regular checking account.
However, over time, you can put your cash to work and generate high liquidity for your business, which can potentially save it if you go through a major hurdle, such as the loss of a key customer.
Increase Prices and Product Rates
If your cash flow is negative, you may need to increase your prices and product rates, which will increase your income. However, it’s important to target a positive response from your current and potential customers using the right marketing mix channels.
Outsource Business Processes
Small business owners can be easily overwhelmed by all the functions they need to cover. A large business typically has a department for each function (marketing, accounting, human resources, finance, and more) and personnel to cover each function.
For a small business owner, covering all areas efficiently can be nearly impossible, so sometimes its essential to outsource. For example, a global payroll company could help you by handling all the documents and legal aspects on your behalf, so you focus on growing your business instead.
Protect Against Data Breaches
Data breaches can be extremely expensive, both financially and in terms of reputation and brand image. Make sure you protect your business using the right methods. For instance, a cloud-based payroll service can keep your data safe.
Cash flow management is crucial for any business. Finding the right solutions for your business is important to stay afloat and be successful in the long term. Outsourcing some key functions, staying informed of your expenses, and monitoring your revenues are some of the main things you can do to avoid cash shortages.