Huma Siraj
One of the most persistent struggles small business people face is managing cash flow. But effective cash flow management also offers one of the strongest levers to boost growth. There are more avenues for reinvestment when money circulates through a business efficiently, be it new opportunities, new products, or new staff. Good cash flow management often forms the dividing line between businesses that can exploit new opportunities and those that just react to challenges.
In stark contrast to a merchant unable to restock goods because too much money is tied up in unpaid invoices, a contractor with timely receipts of payments can comfortably accept more work without much hesitation. The reality for many small business owners is that the potential for their company’s development depends not just on making money on paper, but also on how quickly that money is converted into useful cash.
Small business owners can transform cash flow management from a continuing cause of apprehension into a cause of steadiness and even opportunity, simply by setting up the appropriate mechanisms. Here’s how:
Check your books for accuracy and currency.
These usually have nothing to do with revenue or cash flow. They often come about because of a lack of input/output visibility. Business owners in small businesses have so many things to attend to; bookkeeping is often neglected, thus leading to blind spots and impulsive decisions.
Consider this: How can you be certain you’ll pay suppliers next week or meet payroll next month if you don’t know what’s in your account today? Correct records that are updated regularly provide a much better understanding of where you are today, and help identify trends, weaknesses, and opportunities.
Online systems, which can be set up specifically for a small enterprise, can be helpful by automatically tracking inflows and outflows, showing project balances at any time, and even highlighting gaps or issues. Besides accounting platforms, complementary tools like Shopify might add extra cash flow insight.
Clearly define what you expect from your clients.
One of the most common causes of cash flow constraints, which is frustrating and often out of one’s control, is late payments.A ripple effect is created by the time lag from the delivery of a good or service to when the customer makes the payment on the invoice.
There will inevitably be late payments, but by establishing expectations early on, you can keep the problem from getting worse. Only if your clients comprehend your expectations will they be able to meet them. Clearly state your terms of payment on invoices, and swiftly pursue late invoice payments. To follow up before invoices are due, think about putting up automatic reminders for yourself or your clients.
By automating operations and offering information into impending payments, cash flow issues, or even which clients typically pay late, AI solutions are simplifying this process and enabling more proactivity.
Use modern tools and resources to optimize your bookkeeping.
Most owners of small businesses are not trained in accounting or bookkeeping and do not have the expertise to maintain their records themselves. Statistics may be intimidating, but if you take the time to learn how to make these processes a little easier, it will go much more smoothly.
Accounting solutions that consolidate invoices, expenses, and bank feeds into one view can help remove the guesswork from cash flow by providing insight into your current cash position. This helps you to better position yourself to detect trends early enough, which aids in planning. In addition, this saves time compared to when you have to sort everything out manually.
If you would like more help, you might want to work with an advisor or accountant who can help you develop long-term growth strategy and perform a customized analysis of your books. You will have more time to focus on your actual business and not bookkeeping if you can get some outside assistance to streamline this process.
Keep your personal and business finances separate.
Although it may seem handy at first to run everything via a single bank account, doing so makes it almost impossible to determine how your business is doing. Setting up a specialized company account enables you to know precisely what is flowing in and leaving the account, thereby enabling you to make confident decisions.
This also helps whenever you have to start thinking about taxes. The thought of looking at all of your business and personal statements for the past year, trying to figure out which expense went into what category, is, quite frankly, daunting. Having two accounts also will allow you to pay yourself more intentionally rather than spontaneously when-or if-you do have extra money.
Create a cash reserve in advance of your needs.
Surprises are unavoidable, even with accurate books and proper tracking mechanisms hi, Covid-19. You can have a system breakdown one month and a sudden halt in demand the next. These unexpected events could easily become a disaster if there isn’t a financial buffer to absorb them.
The safety net, then, for your company could be considered a cash reserve. Without this, you may have to dive into your own pockets or apply for an emergency loan. Probably the best method for creating a cushion that protects your company from such sudden shocks is setting aside a certain amount each month.
The general rule is to save up three to six months operating expenses in case of unforeseen situations. Cash flow is more than just another accounting measure. In fact, it’s your company’s growth engine. If cash flow is well-managed, it will be a boon that lets you plan, take advantage of new opportunities, and focus on the expansion of your company.
