Estimated reading time: 6 mins
Even if it’s not the primary aim of every business leader, every business needs to make money. However, beyond looking at solely at what you’re making, your cash flow takes into account the entire equation. It represents the health of the business and even if you are making more money than you were previously, if your cash flow is negative, you are still at significant financial risk. Here, we’re going to look at how to effectively manage and improve your cash flow situation.
Track it all
It may seem obvious to some, the very first step is to make sure that you’re effectively tracking that cash flow. It might be easy to simply count all the cash that you’re bringing in, but unless you’re also including the outgoing in the equation, you don’t have a full picture of your financial health. Bookkeeping software can make it much easier to track both what you make and what you spend, and to categorise all your spending so you can quickly see the greatest sources and take measures to reduce spending when necessary. If you have a team that makes use of an expenses account, ensure you use expense tracking apps so you can have a clear picture of the spend culture in your business, too.
Outline your goals
It’s easy to see whether your cash flow has improved or suffered when comparing it from one period to another. However, how do you when it’s healthy or unhealthy? Finding that key performance indicator is about finding your break even point. There are calculators that can help you see exactly how much you need to be making to break even. This gives you a threshold to maintain in future. If you slip beneath that break even point, then your business could be in danger. If you’re above, then you’re officially at a profitable standard if you can continue to maintain it. It’s important to have a lower limit of how much you will allow your cash flow to fall by.
Know your experts
If you’re looking to make significant changes to how you make and spend money for the sake of your cash flow, then it’s better to do it with help from someone with real expertise. A business accountant is not just a bookkeeper, they can’t effectively be replaced by a piece of software. For one, chartered accountants can be invaluable for tax season. Beyond that, however, they are a consultant that can help you make decisions with the financial health of the business in mind first and foremost. If you’re beneath that break even point and can’t seem to reach it, an accountant may be able to highlight what you need to do. What’s more, accountants are relatively impartial, so they’re willing to deliver some hard truths if you need to hear them.
Get your money sooner
When your cash flow isn’t looking as healthy as it should be, then it’s not uncommon for a business to use a line of credit to give themselves the funding they need so they can keep the business strong or invest in the resources they need. However, there is a wide variety of different loan and financing options to help. Rather than taking out a traditional business loan, it may be wise to finance it based on your current income model. If you use credit card readers, a merchant cash advance can help you borrow based on your average card transactions. Rather than paying back in cash, you pay the loan back with a portion of every credit card purchase from a customer.
Stop the pay delay
If you use invoices more often than cards, invoice financing can be a way of borrowing what you’re owed before it arrives. However, if you’re waiting that long on invoices in the first place, it’s a symptom of a problem that needs to be addressed. Rather than patching it up with financing, you should focus on how to get customers to pay invoices sooner. For instance, you can make the due date a part of the contract and include late fees for those who don’t meet it. Otherwise, it’s a good idea to implement invoicing software that can automatically send reminders to those who haven’t yet paid their bill.
Manage your own bills, too
With that in mind, you have your own bills and debts to consider, too. When taking out loans, aiming for longer term agreements is always better as it gives you the ability to build up your funds and lower monthly payments. However, regardless of what terms you agree to, you should make it a priority that you always pay on time. There are plenty of bill payment reminder apps that can ensure you don’t simply forget them. However, it’s especially unwise to neglect to pay when you’re fully aware of it. You might be keeping your money for now, but late fees can quickly spiral out of control and tank your cash flow.
Beware the seasons
Every business owner should ensure they’re aware of whether or not they run a seasonal business. From there, you need to know when your most profitable seasons are, as well as your leanest. You can take several measures to scale your expenses to fit the seasonal model, but you can also incorporate some ways to keep the business profitable the whole year around. For instance, you can create another source of revenue. If you sell products like heaters in the winter, for instance, then offering maintenance and repair services throughout the year can be an extra way of making money when it’s not the right season for your business. You can also find ways to use off-peak seasons productively, developing the business further so that you can profit even more when the right season comes.
Focus on returners, not just newcomers
Your customers have a huge role to play in the health of your cash flow, of course. But rather than focusing on doing everything you can to win over new customers, it might pay more to ensure you’re not neglecting those you have already won over. It’s true of the vast majority of businesses that retention is cheaper than acquisition. What’s more, retention tends to be more valuable. When you convert a customer, you may only get them for one purchase or service. If you convince them to return, then they are more likely to return of their own volition and even to refer your business to others.
Build a cash reserve
When your business is profitable, returning a portion of that profit into the business to continue developing it is always wise. You might be tempted to take back the rest of the investment yourself, but first you should make sure you have a cash reserve. The unexpected can happen at any moment in a business. Your suppliers could fail, your office could flood, your hardware could simply decide to stop working. A cash reserve is essentially the emergency fund for the business. It’s there to prop up your cash flow and keep things running while also funding the solutions to different crises you might encounter. Work out how much cash you need in reserve and refrain from touching it for anything but emergencies if possible.
Treat cash flow as the financial heart of the business. Negative cash flow can put it at more risk of failure than negative profits. The tips above can help you better understand it, as well as implement techniques to keep it growing strong whatever the market.