5 Must Have Solutions for Managing Cash Flow in Your Business

Effective management of cash is one of the most essential practices for businesses, especially for startups. Running out of money due to unfeasible strategies is among the topmost reasons many companies close shortly after their launch. According to a study performed by Jessie Hagen of U.S. Bank, 82% of businesses fail due to poor management of cash flow. It is therefore very pertinent for small businesses to be smart about how they spend their startup capital.

If you have just joined the ranks of promising entrepreneurs, knowing the ebbs and flows of your business capital would be the best foot forward for your entrepreneurial journey. Effectively and diligently managing your cash flow is the key for the long term survival of your business. Utilizing too much of your working capital can cause a cash crunch in your organization, which can result into delays on the supply side, inability to buy materials from other suppliers, or even difficulty in paying salaries. Since employees are among your greatest assets, so it doesn’t bode well for your business if your employees aren’t satisfied in terms of salary. Untimely salary payment would force them to think where the paycheck went.

It is important to note that during the early stages of growth, your expenses are most likely going to be greater than your revenue.

In simple terms, Cash flow management is the process of tracking how much money is coming into and going out of your business. More technically, it is the process of monitoring, analyzing, and optimizing the net amount of cash receipts minus cash expenses. Keeping the track of this flow helps you spot trends, prepare for the future, and fix the current problems.

Here are some effective solutions for managing cash flow:

1. Determine your breakeven point

Determining your breakeven point is an efficient way to access your true cost of business and your prices. Additionally, you get an idea about the total contribution each product or service makes your company’s overall profit. By figuring out the amount of remaining capacity after the breakeven point is reached, you are able to know the maximum amount of profit that can be generated. At this point, it is important to take into consideration whether your current plan is realistic, or whether you need to raise prices, find a way to cut costs or both.

Conducting the breakeven analysis is a critical step for your business to determine what sales volume is necessary to cover costs. So reaching the point when your total revenue is equal to your total expenses gives you the opportunity to control costs without sacrificing financial freedom. Working on breakeven analysis helps you gain better insight into the accuracy of your prices and how realistic your sales goals are.

The formula for calculating your company’s breakeven point is:

Fixed Costs ÷ (Price – Variable Costs) = Breakeven Point in Units

Fixed costs are expenses that remain relatively the same and don’t change. For example, rent or mortgage expenses. Variable costs are not consistent and change based on production output.

2. Maintain a cash reserve and manage your funds better

Being an entrepreneur, you should expect shortfalls – they may occur even if your plans are in place. So maintaining cash reserves for such situations eases the blow, while allowing you to stay focused on growing your business. It helps your company be prepared for new business opportunities. Before you start building a cash reserve, you should have a good idea of your company’s monthly expenses, which vary from industry to industry. If you keep an updated accounting system, you need to look into your cash flow statements for the past six months. Just review how much you are spending each month.

So how big should your company’s reserve be?

It is important to note here that large reserve is not always the right solution. It locks down the cash that could be used to expand the business.

Further, you need to manage your funds effectively and efficiently, which includes tracking and handling your accounting. Hire a reliable accountant or CFO for cash-flow monitoring. The concerned professional will be responsible for tracking expenditures and revenues, allocating funds to necessary spending accounts, and most importantly, watch savings. You will also need foolproof strategies to boost your cash flow and make your business financially healthy. Here is what you can do for that:

  • Create a cash flow budget
  • Manage the credit you are extending to your customers
  • Keep your payables up-to-date
  • Reduce expenses

3. Cut or delay expenses

There are times when customers don’t pay faster – in such circumstances the option at your disposal is to delay expenses. Unless it is too demanding a situation for you to pay early, you can delay payment to your vendors, of course without risking harming your relationship. This strategy can be used in different forms, depending on the type of business. Manufacturing companies, for example, may consider using lower cost inputs to deliver the same goods or services, while a service company can opt for spending on the same work.

Sometimes it’s hard to differentiate whether you have a need or you want it. In this world of big advertising messaging, it’s natural for businesses to get drifted towards more spending. Delaying the expenses will allow you to buy some time. Moreover, what’s important for one person will be frivolous for another, and what seems to be important today might be not-so-important a year from now. Also, the extra time that you get by the delay can be used to find the best deal.

4. Get a business line of credit

A business line of credit typically creates a cushion for businesses in case of any unexpected cash flow issues. It will keep you from searching for financing in a hurry, causing you to pay more for financing. It allows you to keep a line open with a bank or online lender at no or minimal cost. What happens if you have a late paying customer? What happens if you need extra inventory to fill it? Since you don’t want your employees to suffer because of other’s mistakes, a timely business line of credit will serve as a backup when you need it most. You may be able to get a line of credit for a percentage of your accounts receivable or inventory if you use them as collateral. It will essentially help you draw and repay funds as you wish, as long as you don’t exceed your credit limit.

5. Speed up recovery and receivables

For effective management of your cash flow, you need to bill early and collect quickly. To expedite the payment process, you should bill as early as possible and make those invoices as clear and detailed as possible. Rather than waiting until the end of the month, generate the invoice as soon as the goods or services are delivered. You can even consider offering discounts to customers who would then pay their bills rapidly. If you fail to speed up your recovery and receivables, you might end up squeezing your business’s cash-flow cycles tighter and tighter.

For further steps, you can determine the current payment status of all your accounts and receivables. It can be done by creating an account receivable (A/R) aging report, which will track and measure the payment status of your customers. You need to most really fast on past-due receivables, as many studies have shown that longer receivables go uncollected. So start with a gentle reminder to your customers that payment is now past due.

Conclusion

There are no two views on the fact that cash flow is the lifeblood for any business. It can be maintained through different sources like customer payments, loan receipts, investment, or interests on savings. So to manage better cash flow, you need to know your business well, set a budget to target your sales, and forecast future spending. All aforementioned steps can go a long way in managing your business’s cash flow.

Smith Willas

Smith Willas

Smith is a freelance writer, blogger, and digital media journalist. He has a management degree in Supply Chain & Operations Management and Marketing and boasts a wide-ranging background in digital media.
Smith Willas

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