Cash is king and can determine whether a company stays in business. We’re going to quickly cover the fundamentals of cash flow before offering tips for better managing it.
Cash Flow Basics
Cash is what you as a business owner can spend right this instant. It’s money you have on hand to pay vendors, employees, or purchase supplies with.
Inventory – merchandise you can sell – and accounts receivable – money you’re owed –do not count as cash. Why? It’s simple: Because both are not cash. While they can be converted to cash quickly, inventory and accounts receivable are not cash until they are money in the bank.
The definition of cash flow is the movement of cash in and out of the business. Positive cash flow occurs when a business has more money coming in than going out, a business is making more than it is spending. Negative cash flow happens when a company’s outflow is exceeding its inflow.
Key Parts To Good Cash Flow Management
Good cash management, according to the U.S. Small Business Administration, involves:
- Knowing when, where, and how your cash needs will occur
- Knowing the best sources for meeting additional cash needs
- Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditors
Tips For Better Cash Flow Management
While the U.S. SBA makes good cash flow management sound easy, we know it’s not that simple. Caron Beesley, small business owner and regular contributor to the Small Business Cents blog, recommends these specific tips for better cash flow management.
- Make a budget that includes cash flow projection for the year. To do so, consider which months are your busiest in terms of sales and when fixed and variable expenses are due.
- Streamline your invoicing. Examine your invoicing system and look for ways to increase cash inflow during your slow periods. This could include requiring clients to pay a higher percentage up front.
- Negotiate flexible payment terms from your suppliers. On the other side of the spectrum, see if your suppliers are willing to work with you on your payment plan. With a good track record, many likely would.
- Find alternative sources of income. Sometimes this is easier said than done. Is there a new product or service you could offer that will provide an influx of cash during an off-month or off-season?
- Use your downtime for planning. If you’re in a slow sales month, use the time to analyze your business’ progress. Were your plans accurate? What new products or services can you company introduce next year to diversify your income?
Hopefully following these tips can prevent any cash flow issues you might run into. Do you have any other suggestions for handling cash flow in an efficient manner?
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