Good cash flow can be the difference between your business becoming a success or one of the businesses that fail within the first three years. Poor cash flow can put many obstacles in the way of running a business and make operations more complex than they need to be.
As a general rule, you need to have between three and six months of operating expenses to hand to ensure a healthy cash flow and support your business without stretching yourself too thin. But even if you don’t have this sum built up yet to fall back on, there are still ways you can increase cash flow and ensure you are making healthy financial decisions.
Good Forecasting
Good forecasting means you need to have accurate and up-to-date bookkeeping and be able to track all your income and outgoings.
Look at your weekly or monthly cash receipts and expected payment dates. Then list all of your expenses and calculate your net balance. Staying on top of your bookkeeping can help you to improve your forecasting. It can be done by implementing a credit control process to help you stay on top of payments and avoid outstanding invoices becoming aged debts. But working with credit collections services can be a way of collecting overdue payments quickly to prevent it from impacting you financially, especially if more than one client fails to pay on time.
Plan for Industry and Economic Changes
There will always be fluctuations in business, which will impact your cash flow if you don’t plan for changes. Are taxes or interest rates likely to change? Are you in an industry where you experience fluctuations in sales seasonally? Will economic factors in overseas countries affect your ability to sustain growth, e.g. political unrest? Or are you aware of price changes in raw materials and supplier costs to preempt price hikes that will affect your profit margins? Knowing all of these factors and how they impact you can help you tweak your forecasting and ensure you are financially stable the year round without falling into the red.
Manage Inventory
Holding on to too much stock or not having enough to meet demand will severely impact your ability to make sales on time. Holding unwanted stock will take up space and affect your ability to hit sales targets. Offering reduced rates or deals on slow-moving lines and removing them from your product list can help you to invest in new lines that can help you boost sales. The same with services too. Work with providers that can offer you a “just in time” approach to buying supplies, meaning you aren’t holding onto the stock you don’t need or might not sell.
Manage Expenses
Managing your expenses and talking to employees about how to best control cash flow and process incoming payments can help you ensure everyone is on the same page.
Communication is vital both between you and your employees, and your employees and suppliers and clients are essential to helping you stay on top of your business finances and ensure nothing is being overlooked or missed.
Look at your outgoings and see where you can make savings if you need to, and your employees know what your expectations are regarding purchases and approving offers and discounts for early payers, for example.
Conclusion
Ensuring you have good cash flow is vital to the success of any business, and while it might feel counterproductive to keep on top of all of your bookkeeping, this is what will help you stay afloat in the long run.
