Effectively managing cash flow is vital to the runnings of your business. We all like to see what money is coming in, but if we dont keep track of what money is going out and what is on hand, then your business might be heading for a crash without you even knowing it.
Cash flow is one of the most important metrics to follow - especially when it comes to forecasting the future growth of your business.
The difference between cash flow and profits
Firstly, we just want to clarify that just because you have a profitable business does not mean you have a positive cash flow. This is a misconception that many new or small businesses confuse.
It is possible to have a profitable business, with a negative cash flow. This is not a great situation to be in, as a negative cash flow can become a big issue for your business. So, make sure you take the time (and effort) required to manage your cash flow, and make the necessary changes to impact this.
There are however a number of different measures you can take and tips you can learn on to improve your cash flow in your business.
1. Use software to track your inflows and outflows
Accounting and invoicing software is the easiest and simplest way for you to stay on track with your business cash flow. Effectively, it can automise a lot of your business processes (for example by matching payments to invoices), and also allow you to have a holistic overview of your business cash flows at any point in time.
Especially for small businesses, using an invoicing software can help you organise and register all incoming and outgoing payments. This is the first step towards improving your business cash flow.
2. Send invoices out immediately
The more prompt you are with your invoices, the faster you will be paid. And if this is not the case, then you can send out a payment reminder letter with your invoicing software to those late comers. If that still doesn't work, pick up the phone and call them!
Make sure you are clear, concise, and specific about all details on your invoice - and that includes the payment due date!
3. Offer various payment options for customers
The easier and more convenient you make if for your customers to pay you, the faster they will be to pay you.
It’s much easier for your customers to manage their payments online, as it is for you to receive payment. By offering your customers various online payment options such as accepting credit cards, debit cards, or mobile payment such as Apple Pay and PayPal, the more likely they are to pay you faster.
4. Reduce operating costs
Take the time to review your expenses, and identify areas where you can reduce your costs. Do not spend money on expenses that are not necessary for your business, and be careful which areas in your business you choose to focus on.
Be careful to only cut costs where you can afford to, and in areas that will not hurt your business.
5. Encourage early payments, while discouraging late payments.
You should try offering your customers a cash discount as an incentive to pay early. This is a tactic which often encourages your customers to pay you early on, which will effectively improve your cash inflows.
On that same note, you should also make it clear that just like early payments will be rewarded, late payments will be punishable.
If you are still waiting on overdue payments, you can send out a reminder and also charge an optional late payment fee that will automatically be added to the original amount, and depicted on the reminder letter as the new total. This should encourage your customer to say you ASAP, before the fee is further increased.
6. Experiment with your prices
Another way for you to increase your cash flow is by increasing your prices. Changing - and more specifically increasing - prices is something many business owners are scared to do.
There is no guarantee that increases prices won’t mean losing some sales, but it could also mean an increase in cash inflow. So, there is no harm in experimenting with your prices, and finding out how price elastic your customers are.
Knowing and understanding your flow
As already mentioned, managing your cash flow is crucial for any small business. You cash flow is a representation of all transactions coming in and going out of your business.
It is a good idea to keep track of your cash flow to understand the financial position and health of your business, and you can do this at any time with the statement of cash flows.
Therefore, knowing your business cash flow is not only a good thing for the future growth and expansion of your business, but understanding your cash flow will also provide major insights into your business’ financial state, and where money coming in and out is going towards.