As transactions occur, money is brought into a business, and any expenses flow out of the business. This is the essence of cash flow—the heartbeat of any business. Cash flow continuously pumps, bringing new energy and life in and removing old, used goods. If the flow is disrupted, it can impact how a business operates and jeopardize its health. That’s why cash flow is essential to the breadth of any business, particularly small businesses. Managing cash flow requires some effort. It involves monitoring incoming and outgoing funds, forecasting and predicting future needs, and managing customer and vendor expectations. That said, here are four tips to help small businesses improve cash flow.
1. Automate Financial Monitoring
While online and mobile access to your business accounts is helpful, that doesn’t mean you’ll prioritize monitoring them regularly. It’s all too easy for a few days or weeks to slip by without you checking your accounts. When you do log on, you may be shocked to see that your expenses are much higher than you anticipated. One way to improve cash flow is to set up automated financial monitoring via accounting software.
These tools simplify the financial side of the business, speeding up processes and sending invoice reminders to clients. They can automatically create reports, which allow for real-time monitoring and checking. Also, having the software do the work for you makes it much less prone to errors. With the right tool backing you up, you can feel secure about where your business is at any given time.
Consider your business needs and customization options when looking for this type of software. You want the software to grow with your business. Certain features, such as third-party app integration and tax compliance tools, will make adopting the software easier for everyone.
2. Pay Bills On Time
Paying bills on time is critical in both your personal and business life. In your personal life, it avoids a ding to your credit score or a late fee. The same is true in the business world, although much more is at stake. Paying bills on time ensures a predictable flow of funds, thereby helping improve the cash flow of the business. It also avoids late fees or penalties, which can unnecessarily strain any of your cash reserves, and prevents disruptions to operations.
However, the key is to pay bills on time and not too early. An early payment can tip the cash flow scale in the wrong direction. You may not have the funding from client payments yet to pay the office rent, for instance. Again, using automation software can help set up your payments to best control and improve cash flow.
If you’re running into issues with vendor payments, it’s worth asking if they can work with you to appease your needs. A vendor you work with frequently, such as a transportation company or catering company, may be willing to strike a deal with you. Ask for payment plans if you’re having trouble getting the money for them at the end of the month. Or ask for a percent off if you sign a six-month or 12-month contract. Establishing good relationships with your different vendors can go a long way in terms of boosting your cash flow.
3. Manage Inventory Effectively
Managing inventory effectively can help keep a steady stream of purchasing consumers without too much strain on the business. Having just the right amount of inventory can increase profits, reduce unnecessary costs or losses, and improve customer service.
A business with too much inventory could be at greater financial risk. It ties up financial capital and increases warehouse storage costs. If it’s a perishable or food item, the expiration date may soon make the product too old to sell. Alternatively, products may seem outdated or unneeded, such as winter parkas being sold in June. Gap and Kohl’s are two big department store retailers that have run into this dilemma in recent years.
On the other hand, having too little inventory can lead to unhappy customers. Let’s say you’ve been teasing a big product launch for weeks. On the day of the launch, if eager buyers discover that you ran out of their size or the product entirely, they’ll likely be pretty unhappy. You’re not maximizing what your revenue could be due to shortages.
To manage inventory effectively, you need to take the time to plan, track, audit, and control inventory levels. Review the data and see what times of the year were your biggest and least profitable months. If seasonality is at play, be sure to lean into this. The holidays, as are other promotional periods, are a major time to spend. It may take some trial and error, but with the right strategic outlook, you’ll soon know exactly how much product to keep on your shelves at different points in the year.
4. Create a Cash Reserve
If 2020 taught the world anything, it’s that nothing is predictable. A cash reserve is a safety net that you access during unexpected times of need. Perhaps the cost for one of your product’s raw materials spikes, or maybe a piece of equipment on your manufacturing line breaks. Having cash on hand will help alleviate some financial pressure and maintain a steady cash flow.
How much you keep in the cash reserve is up to you. Most financial institutions recommend anywhere from three to six month’s worth of expenses. As a small business, this may seem unrealistic. Reserve what you can each month, knowing that even a little bit helps the future success and stability of the business.
Photo by Giorgio Trovato; Unsplash
