Solid cash flow management is vital to ensuring your business survives, but not everyone understands what cash flow is or how to manage it. That’s likely what makes it a leading cause of stress for small business owners. In fact, a Capital One study found that 42% of small business owners say cash flow management is a major concern for them.
Cash flow refers to the movement of money into and out of your business. It’s based on the amount of money you bring in minus the amount you spend. A positive cash flow means you’re bringing in more than you’re spending. A negative cash flow means you aren’t bringing in enough to cover your expenses. Your company can run into problems by not charging enough for goods or services, having clients who are chronically late to pay, growing too quickly or simply spending too much money.
Cash flow can vary throughout the year, depending on sales cycles or whether you’ve made a large purchase. Here are three strategies you can use to gain control over your cash flow.
1. Understand your profitability
Managing your cash flow is great, but it won’t help you if your business isn’t profitable. Take a look at each of your products and services to determine how much they bring into your business compared with how much you spend to provide them. Find any inefficiencies in your processes and eliminate them if possible. Figure out where your business is most profitable and where you’re dealing with cost overruns.
The basis of a solid cash flow is ensuring you offer goods and services that are profitable and help you obtain your goals, while reducing those that negatively affect your finances. You may need to increase your prices to reflect the cost of goods sold, or stop selling lower-margin products or services.
Similarly, take a look at your clients. Are there some that you are undercharging or spending too much time and energy on? Can you increase their fees or find higher-paying clients?
2. Write a cash flow forecast
Your cash flow forecast (also called a cash flow projection) predicts how your business will perform financially over a set period. It’s a good idea to have a cash flow forecast for a year, broken down into quarters and months.
The projection takes into account your revenue and expenses over those set periods, and helps you figure out how much you need to make in that period to cover your expenses. It can also allow you to anticipate any upcoming cash flow issues, such as slower periods that may require you to cut back on expenses. If you have any anticipated big-ticket items you’ll need to buy or plans to expand your business, include those in your forecast.
Periodically check your actual cash position against your projection to see how you’re doing and if you need to make any adjustments.
3. Use technology to keep on track
There are plenty of software solutions that can help you gain insight into your company’s cash flow. They can help you build projections and get a real-time view of how your business is doing. This information can then be shared among company managers, so everyone has an idea of how the company is doing financially and where strategies need to be put in place or altered to get you back on track.
Additionally, invoicing software and project management software can be used to encourage faster, easier payment from clients and keep projects on budget. This will also improve your cash flow.
Many business owners find cash flow management stressful, but with a little information, and planning, and by using the right tools, you can have better insights into your company’s financial situation. Those insights will help you make better decisions for your business and gain control over your cash flow.