Philip Campbell, a CPA and author of Never Run Out of Cash, once said that while cash is the lifeblood of businesses, what fuels a company’s success is their ability to efficiently manage their cash flow. He notes that poor cash flow management can cause more business failures — a statement that is proved by the market intelligence provider, CB Insights.
In a 2019 report by CB Insights, 29% of business failures were due to companies losing money. Zirtual, a virtual assistant startup, is one example of this. In a Medium article written by the founder and owner, Maren Kate, she tells the story of how the company dissolved overnight in 2015 after scaling fast and not realizing beforehand that their burn rate was high.
This highlights the importance of cash flow management. Small businesses need to understand that while getting a business off the ground and offering your products are important, keeping a close eye on where your finances are going is what will help sustain your business in the end.
For businesses (both small and established) who are looking to better handle their money, here are three cash flow management tips you can start applying in your everyday finances:
Project your cash flow a week, a month or a year in advance
Measure cash flow before the money even hits or leaves your account. While your cash flow projection may not always be accurate, it will at least give an overview of when your finances are straying from the usual expectation or if you might be hitting roadblocks in your financial flow. This can alert you and other decision makers in the company if there is a need to pivot or take a step back.
To project and determine cash flow ahead of time, you will need to assess your current pricing, the number of customers and clients you have on average, and your current expenses. Take note that invoices or monthly deposits may not always be paid on time.
From these factors, you can make an educated guess on possible cash flow roadblocks and whether you have some leeway for more investments such as hiring a new employee.
Cut down on expenses
This can mean cutting down on supplier costs or letting go of monthly payments that no longer serve both the business and its cash flow.
For example, negotiating prices with suppliers, looking for a supplier with more flexible terms or entirely opting for a low-cost alternative. Sometimes, your business partner may even offer discounts for early or bulk payments. If this led to more savings in the coming months, it could be a viable option.
For those who are experiencing tight cash flow and are unable to buy equipment of their own, leasing what you need is also an option. It will be more affordable, rather than outright investing a lump-sum of money that can negatively impact the current state of your funds.
Efficiently manage your receivables
Some small businesses rely on offering goods and services then wait until someone notices their offers, make a sale and call it a day. However, that may lead to possible cash flow problems due to factors that you cannot control.
Strategizing your receivables ahead of time and finding different options can help make your venture more sustainable in the long run. This can mean offering discounts to customers who pay on time or asking for a deposit and allowing payment plans.
As this Entrepreneur.com article stated, the sooner you get the inventory into receivables and receivables into cash, the better.
These are just some of the tips for better cash flow management for businesses. There are more ways to ensure that money is being spent wisely and sustainably. However, the only way to secure your company is if you take the time to check your statements now and assess how you can further improve cash flow management as early as you can.