Five Ways You Can Ensure Your Small Business Has Good Cash Flow
in Cash Flow & Forecasting on July 3, 2019
Understanding the importance of your cash flow position is crucial to your small business’ success.
Learn five ways you can create a positive cash flow position for your small business.
What Is Cash Flow?
In order to fully understand what cash flow is, first understand what it’s not. While all are important to your business, cash flow projections, financial forecasting, profit and loss statements, and bank account balances all tell you different things about your small business. Understanding your cash flow and creating a cash flow budget will give you the truest snapshot at any moment in time of the overall financial health of your business.
Cash flow is simply the amount of money moving in and out of your business every month.
Cash flow is determined by assessing your accounts payable and accounts receivable, along with your fixed and variable expenses and anticipated sales and revenue. So, while you might be showing a profit on your P&L, if you don’t have positive cash flow, you still might struggle to make payroll or meet other obligations.
Here are five ways you can ensure your business has good cash flow:
- Get a business line of credit. Operating capital is the lifeblood of your small business. A small business line of credit allows you the flexibility to borrow only what you need, when you need it (as opposed to a small business loan, in which you receive the full amount up front). This means you’ll only be paying interest on the money you use, which can save you thousands of dollars in interest over time.
- Consider leasing, not buying, equipment. Because capital is king, it’s prudent to hang on to as much as you can, whether you’re in your start-up phase or looking to expand or scale your business. In many cases, leasing equipment is a smart idea, as you’ll not only need to outlay much less cash upfront, but repairs on and updates to your equipment will likely be covered under your lease.
- Create a rainy day fund. Yes, you should be reinvesting revenue in your business, and you need to pay yourself and your employees a living wage. However, you should also be disciplined enough to set aside a regular amount of money every month, and leave those funds alone. As your business experiences the usual ups and downs, there will be lots of days when you’ll find yourself thinking, “Ok, that rainy day is here.” But be sure to consider all your other options before you touch those funds.
- Create a cash flow budget. Unless you’ve charted a course for where you’re heading, you’ll never know if you’ve arrived. Take stock of what your cash flow needs are over a 6-12 month period, considering any seasonal impacts on your business and what your accounts receivable terms are. Once you’ve created your cash flow budget, decide what steps you need to take to adhere to it on an ongoing basis.
- Use a cash flow management tool. As a small business owner, you have plenty of irons in the fire. Keeping on top of your cash flow can be a slippery slope. Don’t try to reinvent the wheel or get bogged down in the land of spreadsheets. Look for a cash flow management tool that makes it easy to update projects’ statuses and gives you a broad overview of what’s coming in and going out at any point in time.
As a small business owner, you have plenty of things to keep you up at night– worrying about marketing, product development, staffing, customer relations and a million other things that never occurred to you to worry about before you started your business. While managing your cash flow is essential, it won’t get between you and your sanity if you follow this advice.
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