By Rodney Laws.

Cash flow is a central issue for all businesses — balancing your income against your expenses to ensure you have enough cash available to continue operating can be very complicated. Many businesses, especially startups and small businesses, can underestimate just how important cash flow management is.

We’re going to run through exactly why your business needs to manage your cash flow and ways in which you can improve it.

Why is cash flow management important?

Cash flow isn’t a clear indicator of how well your business is doing — you’ll be making long term investments that pay off at a later date, or a large portion of your money is tied up in stock.

And while these are necessary expenditures in running a business, if you invest too much money you might not have enough to pay out in the short term. Rent, suppliers, and employees all need paying regularly, and you can’t wait until you have the cash available to pay.

Lack of cash reserves is one of the top reasons that startups fail. Cashflow is a clear indicator of how safe your business is, and what you have to fall back on if your investments don’t pay off.

It’s particularly important for new businesses when you have endless outgoings to get things up and running. You need to have a clear idea of when you will start to see some sales or income. Seasonal businesses also rely on good cash flow management as any profits will need to cover periods with reduced or little income.

What’s the difference between cash and profit?

It’s pretty easy to get confused between profit and cash. On paper, your business might have income, but it’s not necessarily always physically available as cash that you can access and use. Profits won’t ensure you’re able to pay your bills. You might have sold products or services and billed customers, which is considered profit, but until it’s been paid you don’t have the cash.

How to improve your cash flow management

Whatever type or size of business you’re running, cash flow management is something that needs to be prioritized. These are some starting points for improving your cash flow management:

Reduce your expenses

While some expenses such as wages for your existing employees are set in stone there are a number of expenses that can be reduced.

If you’re renting an office space, you could look at moving somewhere new for a better deal, or consider downsizing the office if some of your employees would prefer to work from home. And if you own the property, make sure you keep on top of renewing your mortgage so that you’re always getting the best rates.

When you’re looking to hire more staff, look at hiring graduates or candidates with less experience that are willing to learn. You can save some money, but also employees that receive regular training and learn new skills on the job feel valued and they’re more likely to stick with your company long term. HR analytics can also help to optimize your costs.

For bills always use a comparison site like Uswitch to ensure you’re getting the best possible deal for your broadband, gas, and electricity. And if your business involves a lot of driving, then a fuel card like the DCI card can provide competitive fuel rates. Fuel card comparison site, iCompario, will help you to find the best one and clearly explain the benefits.

Don’t invest too much money

It’s easy to get carried away when money starts coming in to just invest it all back into the business. However, it’s no good having a warehouse filled to the brim with stock but no money to pay the rent. Use inventory management software like Veeqo to monitor stock levels carefully and only order the stock that you’re going to be able to sell.

Keep on top of your invoicing

If you’re running a business where you provide your service or products before receiving payment then it’s important that you have a reliable system in place for collecting your money.

Don’t allow customers to go long periods without paying off their account, and don’t let them rack up a huge bill – you need regular payments. Most accounting software such as Xero will have invoicing features that can send out invoices, payment reminders, and provide online payment options.

For a subscription business, consider how monthly or annual billing will affect your cash flow – if you choose annual will you have enough cash to cover the months with fewer payments.

No business should underestimate just how important cash flow is. Follow these steps and spend some time thinking about your cash flow management – reduce your expenses and keep an eye on your finances to ensure you’re never short on cash.

 

Feature Image Credit: Pexels

By Rodney Laws

Editor at Ecommerce Platforms, https://ecommerceplatforms.io