Learning how to manage small business cash flow is one of the most important things you can do for your business. With proper management, your business will have the cash it needs to stay in operation and grow. Without management, you may find yourself running out of money and unable to keep your operations going.
Let’s take a closer look at what cash flow management is, why it’s important and how to do it.
What Is Cash Flow Management?
You know that cash flow management is important, but what exactly is it? Original keyword was “managing cash flow small business,” but I adjusted it to be grammatically correct is both an art and a science. It’s the practice of:
- Tracking the cash that’s coming into your business.
- Tracking the cash that’s going out of your business.
- Taking steps to ensure that more cash is coming in than going out.
When you know how much money your business is bringing in and how much it’s spending, you can determine whether you need to make changes to your operations or sales to avoid running out of money.
Why is Cash Flow Important to a Business?
Cash flow is vital to a business because it determines whether the company has enough cash to:
- Pay their suppliers/vendors
- Pay employees
- Pay their utilities, debts and other bills
- Continue operations
Let’s say that a business has more cash going out than coming in. This would be considered negative cash flow. Eventually, the business will run out of money and may struggle to continue operations if they hit a slow period. With cash flow management, you can make decisions to cut back on costs or change your pricing to help bring your cash flow back into the positive range.
Alternatively, if a business is generating more cash than it is spending, decisions can be made to help the company grow, such as hiring or expanding to new locations.
Whether positive or negative, businesses need to be tracking their cash flow. The financial health of their business depends on it.
How To Manage Your Cash Flow Effectively
So, how do you manage cash flow for business? Cash flow management doesn’t have to be complicated. Here are some tips to help you effectively manage your cash flow.
Create Cash Flow Forecasts
One of the simplest and most effective ways to manage cash flow is to create cash flow forecasts. Forecasting helps you predict problems with your future cash flow and take steps now to prevent them.
Forecasting also helps you make smarter business decisions and plan for slow periods to prevent your business from running out of cash.
Identify Income and Expenses
To manage your cash flow, you need to know how much money is coming into your business and how much money is going out.
- Identify all of your income sources, including sales, investments and loans.
- Identify all of your expenses, including overhead and debts.
Make sure that you identify all sources for both your income and expenses. Then, go over your list carefully and review bank statements to ensure you’re not leaving anything out.
Reducing your business’s expenses will have a positive effect on your cash flow. Review your expenses carefully and determine whether you can reduce or eliminate unnecessary spending.
- Negotiating with suppliers to see if they can offer a better price or better payment terms
- Negotiating with your landlord (if renting your space) to lower the cost of rent
If you have expenses that are eating into your cash flow and don’t really have a positive impact on your operations, then see if you can eliminate them entirely.
Keep Up with Reporting
Financial reporting plays an important role in cash flow management. Make sure that your financial reports are up to date. Otherwise, it will be difficult to create accurate cash flow forecasts and statements.
Financial reports help you:
- Create accurate and reliable cash flow forecasts, projections and statements
- Make plans for the future
- Gauge the financial health of your business
- Apply for loans or financing strategically
Don’t let financial reporting fall to the backburner if you want to manage your cash flow properly.
Cash flow management is crucial for every business. If you’re not keeping track of how much money is going into and out of your business, you can easily find yourself struggling to make ends meet. Proper management will ensure that your business has the ability to grow and thrive.