Your cash flow is essentially the income and expenditure for your business. The cash that goes out in bills and business expenses versus the cash that comes in to your business via sales and investments. Careful management of this can mean the difference between success and failure as a business and often doesn’t need to be complicated at all. This article will give you a few simple steps you can take to set up a good cash flow management system for your small business – even if it’s just a basic spread sheet to start!
Why managing cash flow is important for financial success
So why is managing your cash flow so important? First and foremost, it allows you to see whether your business is running at a surplus or a deficit and to take action accordingly.
It can be tempting just to focus on what revenue your business is making but if your expenses exceed it then even if your revenue is high, your business will still have problems. Equally, revenue doesn’t equal cash in your account until it has actually been paid to you. So your accounts may appear healthy because you’ve earned a large amount of revenue, but your cash flow may still be negative because you haven’t been paid yet.”
How to manage cash flow for your small business
At its most basic level, cash flow management is understanding what money you have flowing into your business (via sales, investments etc.) and what money you have flowing out of your business (via bills etc). This doesn’t have to be complex – perhaps just a simple spreadsheet showing cash in versus cash out, but it is important to have a record of this for your business so you can keep track.
If you feel like you need something a little more sophisticated than a spread sheet then there are a number of tools available that you can help you to manage your cash flow. Here are a few for you to check out…
Set cash flow goals
By setting goals, you can plan ahead. This helps you to understand what money you need to collect each week or month in order to maintain a positive cash flow. By combining these goals with a good credit control process, you can give your business the best chance at a healthy cash flow.
As we mentioned earlier, revenue doesn’t necessarily mean a healthy cash flow. You need to be paid first! That’s why it makes sense to invoice promptly, ensuring that you’re making it as easy as possible for your customers and clients to pay you promptly.
Offering payment packages
This can be especially useful if you are selling a high value product or service which may take weeks or months to complete. By offering an option for the payment to be spread over a certain amount of time, you can ensure that you have regular cash coming in rather than one big lump either at the beginning or end of your sale period.
Seek help before things go too far
If you find that you are straying too far into negative cash flow then don’t be tempted to bury your head in the sand. It may be that a temporary boost could help you get back on track. Stay in contact with your business bank and make sure you get the support you need straightaway.