It’s scary, but it’s true. Lack of Business cash flow management is often the cause of small business failure. There are many strategies that you can employ to ensure your business has enough cash to pay its expenses and continue to grow your revenues. You can be financially savvy, but there are certain things you must know about cash flow to succeed.
What is Business Cash Flow?
You may have heard the term “cash flow” used a lot but don’t know what it means. Cash flows in and out of a business’s accounts through sales or revenue and expenses. The ideal situation is to have more cash coming into your business than going out. This means that you have positive business cash flow management.
Cash flow is not the same as profit. Cash flow is different from profit. After you have paid taxes, paid vendors, bought inventory or supplies, and paid any other bills; your business accumulates that money and becomes profitable. You could technically keep all that money as a disbursement for your business as the owner. What happens if your clients don’t pay you for those bills? You have an unexpected expense, such as the need to replace your computer.
This is where business cash flow management can be a great help. Your bank account should never be at zero. There will always be additional expenses, and you must be ready for them. Businesses that are running low on cash can be frustrating, as the profits often come from business owners. If you want your business to grow, it is important to have money in your bank account.
Are you ready to master cash flow? These are the four essential things to keep in mind.
How your cash flow cycle affects your ability to pay bills
Cash flow is a challenge for every business. It refers to how much cash you have and how long it takes. If you make your own products, then you will need to have the time and resources for the following:
- Ordering materials
- The product’s sewing
- Product packaging
- Shipping it
- Receiving funds through credit card transactions
Your cash flow will be affected by how long it takes to get cash. You can’t pay vendors if your cash is held in inventory. Many businesses have very long cash flow cycles and need to plan strategically to make sure they can pay vendors while waiting for the product to be made.
There are many ways to improve your cash flow cycle:
- You can buy smaller quantities of inventory (you might pay more per item, but you’ll tie up more cash).
- Hiring staff to assist you during busy seasons
- You can use tactics to get paid quicker, such as requiring payment upfront for all or part of an order.
Higher profit margins mean better cash flow
Now is the time to review your pricing. You’ll have to work harder to keep your cash flowing if you charge too much. If your profit margins increase, it means you have more cash available. This makes cash flow easier since you should always have money. These are some tips for pricing.
- Compare the prices of your competitors and set your own price.
- Provide extra value to justify higher prices.
- To keep existing customers happy
Certain Investments Can Get More Revenue
Although it may seem counterintuitive to suggest that you could make more money by spending more time on your business, it is true. You could be spending five hours per week managing your accounting, marketing, and other business operations. This is time you could be using to grow your business. You can save time by hiring an accountant, marketer, or assistant to help you find ways to increase your cash flow.
Don’t forget a business investment is one that will ensure its future. Although it may seem scary to spend more money on it, the long-term investment will pay off.