Just as the name suggests, cash flow involves the money coming in and going out of your business. If more money is coming into your business than moving out, you have a positive cash flow. This not only indicates that your business is gaining funds, but it also ensures you can meet your business needs- such as settling any outstanding debts, making investments, paying your employees, and managing other expenses. A positive cash flow is essential for business growth. However, if more money is flowing out of your business than is coming in, you are at risk of being overdrawn and unable to meet your vital expenses. Let’s explore how you can improve your cash flow and use that to achieve your business goals.
Create a Cash Flow Forecast
Assessing your cash flow is crucial to determining the financial health of your company. Your cashflow forecast should illustrate your financial expectations on a monthly or yearly basis. This will enable you to understand your financial liquidity and overall business cycles, and it can also indicate whether your business is on solid ground and positioned to remain solvent. With predictable cash flow, your business can chart a pathway to growth.
The first number you’ll need to determine before calculating your cash flow is your net income. Net income is your company’s total profits over a specified period, a number that’s calculated by subtracting your various expenses, amortization, depreciation, taxes and interest from your total revenue, which includes your account receivables (your customers’ unpaid amounts). Net cash flow takes into account whatever day-to-day changes you might have in working capital (the difference between all your assets and all your liabilities), as well as non-cash expenses such as depreciation.
While your cash flow projection can be made on a monthly or yearly basis, most companies prefer yearly. Needless to say, you should aim to ensure you have a positive cash flow over the course of at least a six-month basis.
See also: How to Determine Your Small Business Financing Needs.
Keep Them Separated
Resist any temptation you might have to mix personal and business funds. For one thing, it complicates matters and that could lead to mistakes- like overlooking bad business decisions. It might also result in you missing opportunities at making legitimate tax deductions, or worse yet, opening yourself up to potential legal and IRS problems. The potential drawbacks far outweigh any perceived short-term perks.
Reduce Your Overhead Costs
Overhead costs sometimes have a way of disrupting your cash flow. This is the case because you can’t always expect revenues to exceed expenses every single month, but you still need to pay for fixed costs regardless of whether or not your business hits your projected monthly revenue. To reduce overhead costs, you’ll have to cut down on monthly payments of fixed assets such as business equipment and vehicles.
Instead of buying new equipment or vehicles to replace old ones, you can lease them. Leasing will offer you tax incentives, and your money won’t be spent on depreciating assets. You can also reduce overhead costs by cutting staff overtime. It’s also worth considering reducing your hours of operation, as that can reduce your power and water bill costs. Of course, you should only cut hours that are generating the least amount of business- if you’re in a brick and mortar store setting, you’ll likely only want to cut hours at the start or end of the day.
Stretch Out Your Payables
You may have to consider negotiating with your vendors to stretch out your payables. While some vendors can be flexible, others are firms in their demands- so put on your negotiating hat and do your best to win them over. If over the months or years you’ve created a good rapport with your service providers, then they may be more likely to do you a solid and let you stretch out your payables. Doing this gives you extra time to accumulate cash, so it’ll be easier to pay all of your vendors.
Evaluate Your Payment System
If your business has been suffering from cash flow deficits, perhaps it’s time you reviewed your accounts receivable payment system. Create a payment system that offers a range of payment methods for your clients and with short payment terms, to ensure you receive payment promptly. You can also offer discounts for early payments to further encourage that behavior- and consider applying interest penalties to deter late payments.
Manage Your Inventory
Take time to regularly review your inventory to know the cost and benefit of keeping various stock items. For instance, you might be incurring a cash flow deficit because of the cost associated with storing a massive stock that’s way beyond demand. Alternatively, you might also be losing clients and sales because your stock is insufficient and cannot meet their needs. To have a steady cash flow, it’s important to make sure that your stock corresponds to market demand. It will ensure not only increased sales, but also potential new customers for your business.
See also: 7 Questions To Ask When Choosing a Business Loan.
While these tips can enable your small business to attain a positive cash flow, the reality is there are no overnight solutions. Getting back on track requires patience and commitment. Remember: it’s a long-term business journey!
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This communication is provided for informational purposes only. It is not intended to be an advertisement, a solicitation, or constitute professional advice, including legal, financial, or tax advice, nor is StreetShares providing advice on any particular situation.