Cash Flow Management Is Critical to Your Business’s Success
Small and medium-sized businesses face unique challenges and properly managing cash flow sits at the top. In fact, when businesses fail, 82% of the time, it’s due to poor cash flow management.
For long-term financial success, every business owner must have a solid cash flow management strategy. With the right plan in place, you’ll be able to pay your employees and your bills, and you’ll know exactly where you stand financially. However, achieving and maintaining positive cash flow takes work.
Taking steps to manage cash flow proactively will determine the success of your business and help you avoid common struggles that over 60% of small businesses face globally.
What Is Cash Flow Management?
Simply put, cash flow is the money moving in and out of your business.
Proper management ensures you’re consistently earning more than you spend. Knowing exactly how much cash is flowing through your business (not including the payments you’re awaiting) is critical when it comes to maintaining the health of your business.
Positive cash flow ensures you can meet the demands of your business. You need money on hand to cover payroll, business purchases, payments, operations, and emergencies. Without knowing exactly how much cash you have on hand, you could become unable to pay your employees or cover your monthly business costs.
While every business faces ups and downs, understanding the needs and expenses of your business is pivotal. Proper planning can prevent layoffs, reduce costs, and create a cushion for discretionary spending.
3 Steps for Better Cash Flow Management
If you’re feeling unsure about the health of your cash flow, there are a few simple things you can do to gain control.
1. Identify the cash flow your business needs.
There are three main formulas to calculate and understand your cash flow:
Free Cash Flow is the cash you have left over after paying for operational overhead and capital expenditures.
Operating Cash Flow is the daily cash flow your business generates with its operations.
Cash Flow Forecast is a calculated prediction of your cash flow in the coming month, quarter, or year.
Knowing your cash flow in these three areas is the first step in achieving positive cash flow management.
2. Protect your cash flow on a daily basis.
Utilizing simple strategies in your daily operations can help you maintain a healthy cash flow. Here are some tips:
Invoice Customers Quickly
You want to be receiving payments as soon after delivering goods or services as possible. Having consistent accounts payable and receivable processes with built-in follow-up tactics can ensure consistent cash flow.
Closely Monitor Your Inventory
Identify and target items in your inventory that aren’t moving. Offloading these at a reduced cost will free up cash flow and create room for better-selling items. Invest in stocking best-selling goods to keep a steady cash flow.
Borrow Before You Need It
Getting ahead of a cash flow deficit can keep your business afloat before you get in a bind. It’s easier to open a business line of credit when your business is in good financial standing than when it’s not. Using this as a lifeline and not as your main source of cash flow is a way to get back on track.
3. Work with a pro to create a personalized plan.
Prioritizing cash flow strategies in your business plan will give you peace of mind. Knowing the timing of cash coming in and out of your accounts every month enables you to move forward and confidently grow your business.
Business owners have a lot to manage. Working with a professional business advisor is a powerful step to help you properly manage cash flow. Modis Advisors can help you assess the health of your cash flow and build a plan for better management. Reach out to us today to learn more.