Cash Flow Advice for Small Businesses
Solid cash flow management is vital to ensuring your business survives, but not everyone understands what cash flow is or how to manage it. That’s likely what makes it a leading cause of stress for small business owners.
Cash flow refers to the movement of money into and out of your business. It’s based on the amount of money you bring in minus the amount you spend. A positive cash flow means you’re bringing in more than you’re spending. A negative cash flow means you aren’t bringing in enough to cover your expenses. Your company can run into problems by not charging enough for goods or services, having clients who are chronically late to pay, growing too quickly or simply spending too much money.
Cash flow can vary throughout the year, depending on sales cycles or whether you’ve made a large purchase. We have three strategies you can use to gain control over your cash flow.
1. Understand your profitability
Managing your cash flow is great, but it won’t help you if your business isn’t profitable. Take a look at each of your products and services to determine how much they bring into your business compared with how much you spend to provide them. Find any inefficiencies in your processes and eliminate them if possible. Figure out where your business is most profitable and where you’re dealing with cost overruns.
The basis of a solid cash flow is ensuring you offer goods and services that are profitable and help you obtain your goals, while reducing those that negatively affect your finances. You may need to increase your prices to reflect the cost of goods sold, or stop selling lower-margin products or services.
Similarly for those in the services market, take a look at your clients. Are there some that you are undercharging or spending too much time and energy on? Can you increase their fees or find higher-paying clients?
2. Write a cash flow forecast
Your cash flow forecast predicts how your business will perform financially over a set period of time. It’s a good idea to have a cash flow forecast for a year, broken down into quarters and months.
The forecast takes into account your potential income and expenses over those set periods, and helps you figure out how much you need to make in that period to cover your expenses. It can also allow you to anticipate any upcoming stormy cash flow issues, such as slower periods that may require you to cut back on expenses and get finance lined up to help you through. If you have any anticipated big-ticket items you’ll need to buy or plans to expand your business, include those in your forecast.
Periodically check your actual cash position against your projection to see how you’re doing and if you need to make any adjustments. Being part of an accountability group can help ensure you are checking in and staying on top of the cash flow.
3. Use technology to keep on track
There are plenty of software solutions that can help you gain insight into your company’s cash flow. They can help you build forecasts and scenarios and get a real-time view of how your business is doing. This information can then be shared among company managers or directors, so everyone has an idea of how the company is doing financially and where strategies need to be put in place or altered to get you back on track.
Additionally, invoicing software and project management software can be used to manage jobs better, encourage faster, easier payment from clients and keep projects on budget. This will also improve your cash flow and reporting.
Final thoughts
Many business owners find cash flow management stressful, we totally get it! But, with a little information, some planning, using the right tools, you can have better insights into your company’s financial situation. Those insights will help you make better decisions for your business and gain control over your cash flow. How does it get better than that?
How can we help?
The team at Ontrack Bookkeeping provide Business Development & Support services to support, coach and mentor businesses through the challenges that comes with owning a business. Reach out if you would like to know more about how we can help. We would love the opportunity to discuss your specific situation so we can see how we can support you.