Businesses survive when there is an ensured solid cash flow management. However, not everyone understands what cash flow is and how it can be managed. That’s likely what makes it a leading cause of stress for small business owners. In fact, 42% of small business owners say cash flow management is a major concern for them based on Capital One study.
Cash flow refers to the movement of money into and out of your business at a certain point in time. The net cash flow is the difference of the amount you bring in and the amount you spend. A positive cash flow means you’re bringing in more than you’re spending while a negative cash flow means you aren’t bringing in enough to cover your expenses. Not charging enough for goods or services, having clients who are chronically late to pay, growing too quickly or simply spending too much money could lead your company into problems.
Cash flow can vary throughout the year, depending on sales cycles or whether you’ve made a large purchase. Here are three strategies you can use to gain control over your cash flow.
1. Understand your profitability
Managing your cash flow is great, but it won’t help you if your business isn’t profitable. Look at each of your products and services to determine how much they bring into your business compared with how much you spend to provide them. Any inefficiencies in your processes should be eliminated if possible. Have a cost analysis on all your operations to figure out where your business gains more profit and where you’re dealing with cost overruns.
A solid cash flow is ensuring you offer goods and services that are profitable and help you obtain your goals, while reducing those that negatively affect your finances. You may need to increase your prices to reflect the cost of goods sold or stop selling lower-margin products or services.
Similarly, look at your clients. Are there some that you are undercharging or spending too much time and energy on? Can you increase their fees or find higher-paying clients?
2. Write a cash flow forecast
Your cash flow forecast (also called a cash flow projection) is a method that predicts how your business will perform financially over a set period. Ideally, you should have a cash flow forecast for a year, broken down into quarters and months.
The projection considers your revenue and expenses over those set periods which helps you figure out how much you need to make in that period to cover your expenses. It can also allow you to anticipate any future cash flow issues. This can be the slower periods that may require you to cut back on expenses. If you have any anticipated big-ticket items you’ll need to buy or plans to expand your business, include those in your forecast.
Periodically monitor your actual cash position against your projection to see how you’re doing and if you need to make any adjustments.
3. Use technology to keep on track
With the technology today, various software solutions are available that can help you gain insight into your company’s cash flow. From building projections to getting a real-time view of how your business is doing, you can already have it using software applications.
Company managers can have this shared information and everyone can have an idea of how the company is doing financially and where strategies need to be put in place or altered to get you back on track.
Additionally, invoicing software and project management software can be used to encourage faster, easier payment from clients and keep projects on budget. This will also improve your cash flow.
Final thoughts
It’s inevitable that business owners find cash flow management stressful, however with enough information, planning, usage of right methods, you can have better insights into your company’s financial situation. Thus, helps you in making business decisions and gain control over your cash flow.
About Mizael Partners
Aside from bookkeeping services, Mizael Partners are also tax accountants, auditors and experts in providing accounting, tax and audit services. Mizael Partners is an accounting business located in Ringwood – Eastern suburb Melbourne – which can help your business with assurance, audit, forensic accounting, SMSF audit, trust account audit and accounting support.
Mizael Partners provide Accounting, Audit and Bookkeeping services in the following suburbs:
Ringwood, Ringwood East, Ringwood North, Croydon, Croydon South, Mitcham, Nunawading, Donvale, Doncaster, Doncaster East, Melbourne, Melbourne CBD, Kilsyth, Glen Waverly, Wantirna, Wantirna South, Clayton, Chadstone, Box Hill, Malvern East, Dandenong, Springvale, Blackburn, Blackburn South, Blackburn North, Burwood, Burwood East, Vermont South, Ashwood, Bayswater, Bentleigh, Mitcham, Forest Hill, Templestowe, Bulleen, Balwyn, Balwyn North, Surrey Hills, Hawthorn, Canterbury, Glen Iris, Oakleigh