Cash flow is one of the main factors that show the financial health of your business. Without a steady cash flow, expanding or keeping your business afloat can become quite challenging. For instance, your business may easily get compromised when cash is tied up in unpaid or late invoices and can no longer pay the employees or bills.
Maintaining a healthy cash flow is particularly crucial in the early days of your business. That’s because you typically have many expenses to pay but no customers to bring in cash into your new business. Effective cash flow management can help ensure you have more money coming in than going out of your small company. If you’re not good with numbers, get professional accounting services like Pherrus Financial Services to help you stay on top of your cash flow.
Here are a few tips to help you better manage your small business cash flow:
1. Create a Cash Flow Statement and Forecast
Create and analyze your cash flow statement and forecast to better view your actual and forecast monthly cash flow. Updating your accounting data can also help you better forecast future cash flow for your small business.
This will help you know the amount you need to make to ensure consistent, positive cash flow. These financial documents are easy to create even without prior accounting experience. Also, modern accounting software includes a cash flow statement that you can use to create one for your small business.
2. Encouraging Prompt Payments from Customers
Extending credit to your customers can help build trust and attract new business but can also negatively impact your cash flow, as it can lead to late payments, leaving your business without cash to pay employee wages, pay the bills, or buy new stock. That can compromise your small business operations until the money is paid.
You can prevent these cash flow problems by taking payments immediately, and the best ways to encourage your customers to make timely payments are offering discounts to customers who make quick payments, charging interest on late payments, providing digital payment methods, investing in automated invoicing, and imposing ‘pay on delivery or receipt’ terms.
3. Build a cash reserve
Building a cash reserve is another effective way to manage your business cash flow. Saving extra funds can help keep your business from experiencing cash flow problems when faced with unexpected expenses. It provides you with the money you need to scale your business. A cash reserve can also prevent you from taking out high-interest loans from banks and other lenders in case of a sudden expenditure.
With some cash set aside, you can take advantage of opportunities as soon as they become available. For instance, you can take advantage of a deep discount or deals to buy new stock or take on a new client or large contract. This way, you can keep your business afloat and grow it in the long term.
A steady, positive cash flow plays a crucial role in the success and growth of your business. Use the above tips to better manage and boost your finances to put your small business on the path to success in the long term.