Good cash flow management keeps the heart of your startup pumping. So let’s learn to manage your cash flow properly to help you reach the finish line.
Picture this: the profitability graph shows an upward trend lately. There is nothing to worry about, right? Well, that alone is not a guarantee that your business is doing great. This is where cash flow management comes in handy.
To review the overall health of your business, you have to look closely at your cash flow statement. Don’t be part of the statistics where 82% of businesses failed due to poor cash flow management. Avoid the risk of bankruptcy by making the right budget plan. With that, let’s start the discussion by defining the different components of a cash flow.
Basics of Cash Flow: A Review
Let’s go back to the essential—what is cash flow? It describes the moving in and out of cash in your business. As an entrepreneur, you should track it weekly, monthly, or quarterly. How you track your cash flow depends on your strategy.
Now, there are two kinds of cash flow. The first one is called the positive cash flow. This occurs when money coming into your business is greater than your expenditures.
On the other hand, a negative cash flow spells trouble. It happens when the outflow of cash is more than the money coming in. But don’t worry, you can cut corners and plan to generate more income.
For instance, your monthly operational expenses are greater than your receivables. That is what we call negative cash flow. But if your sales far outweigh your monthly payables, that calls for celebration because you have a positive cash flow.
Profit versus Cash Flow, What’s the Difference
Contrary to popular belief, profit is not equal to cash flow. Revenue is what you get after factoring out the expenses from your financial statement.
However, these two words are connected. Improving cash flow can increase your profit. And just because there is movement in your finances doesn’t mean you’re gaining anything. That is why you need good cash flow management to grow your business and increase your profit.
12 Practical Cash Flow Management Tips Entrepreneurs Should Know
Growth is not the sole solution to a negative cash flow. If done wrong, it can only add to your problems.
So, how can you make sure that your cash flow statement dwells more on the positive side? Follow these practical tips to avoid the common pitfalls of a startup business.
1. Keep tabs on your expenditures
Take time to review your accounting records regularly. Make sure they are accurate and updated. This helps you create a financial forecast based on your business’ historical data. When you do it at least monthly, you can plan for the lean months or anticipate scheduled incoming funds.
2. Try leasing instead of buying things
At some point, leasing may seem more expensive than buying equipment or office space. However, it’s a practical solution if your company is not yet cash abundant. When you pay in small increments every month, it eases the pressure on your daily operational budget.
What’s more? Lease payment is a form of business expense, which can be written off from your taxable income.
3. Offer incentives to encourage early invoice payment
Who doesn’t love discounts and incentives? When you offer them to your customers in exchange for early invoice payment, it’s a win-win situation. Remember that customer loyalty is always good for cash flow. And it can also help you establish a stronger relationship with your customers.
4. Regulate customer credit lines
This is one of the most straightforward yet most neglected steps for proper cash flow management. A customer’s bad credit score is likely going to be an issue for your business, too. So no matter how tempting it is to make a sale, it’s better to tighten your credit requirements than being sorry.
5. Conduct routine inventory checks
Check your inventory from time to time. Take note of products that aren’t selling as expected. These things could become a liability in your cash flow management.
As you get a clearer picture of what sells and what doesn’t, you can make orders accordingly. And what happens to unsold inventory? Well, you can still sell them at a discounted price. At least you can get your capital back.
6. Make invoicing a priority
Don’t wait for the grass to grow before sending your invoices. This way, receivables come in quickly, which helps for a positive cash flow.
Moreover, allocate energy and effort in putting up a good invoice. Make sure the document is direct and clear. Put the payment due date legibly at the top. Print the terms and conditions clearly, especially information on late payment fees.
Most importantly, take care of unpaid invoices immediately.
7. Maintain positive relationships with suppliers
Get a better deal from your suppliers by establishing a professional yet friendly relationship. When you do so, it’s easier to ask for discounts for bulk orders. You can even negotiate for incentives, especially if you offer an early payment scheme.
8. Look for high-interest saving accounts
A good cash flow management plan includes a high-interest savings account. This provides liquidity as you grow your funds for the rainy days. Therefore, put your money where the interest rate is higher than the national average.
9. Raise your pricing for products or services
It can seem a bit intimidating for entrepreneurs to increase their pricing. Because what if the response is not as positive as you envision, right?
But given the right pricing calculation as part of your marketing mix, the yield can outweigh the potential risks. This is especially true if you have already acquired a loyal following.
10. Use technology to take your business processes to another level
Choosing the right business technology increases efficiency and productivity. So try to leverage software and tech equipment. These advancements reduce the time and effort required for as many processes in your business.
11. Explore the benefits of business outsourcing
Have you considered outsourcing some business functions? Try to assess your needs and see if there are areas that don’t require full-time employees. For instance, hiring an offshore software development team is more cost-effective if you only need occasional system updates.
12. Protect your assets from unauthorized access
Control the access to corporate bank accounts and other financial sources. At times, good cash flow management also entails protecting your assets from fraudulent activities. So make sure that your assets are safe against cyberattacks and other security risks.
Critical Takeaways for A Better Cash Flow Management
There are many ways to experience a positive cash flow. All you need to do is heed the practical cash flow management tips mentioned above. And remember that you have a choice on what to do. Whether you choose to increase your revenue sources or decrease your expenditures, it’s all up to your business strategy.
Now, do you need help with your business’s technological advancements?
Full Scale offers software development services to entrepreneurs of all business sizes. With our highly skilled, experienced developers, we can help push your enterprise in the right direction.
Now is the chance to grow your business quickly. Contact us now! We’re more than happy to provide a FREE consultation too.