Managing cash flow in your small business
Posted by Northadvisory on February 8, 2021
For your small business to survive and thrive, managing cash flow effectively is crucial. By conducting regular cash flow ‘health checks’, you’ll be able to see where you are spending your money, where you can improve, and most importantly… where you can grow.
What is cash flow?
Just as the name suggests, cash flow is the flow of money into and out of your business.
Cash flows in through revenue, investment earnings, interest on savings and so on. But expenses such as bills, salary payments and taxes mean a lot flows straight back out.
Just like a flowing river, cash flow is ever changing and influenced by the environment around it. Seasonal changes, tax payments or economic shifts can all affect your cash flow, so understanding, predicting and preparing for these changes in cash flow is critical.
Why is cash flow important?
While profit might be the goal of your business, without cash there’s no business in the first place. Every business needs cash to operate and expand, suppliers and staff all need to be paid, and strategies for growth generally require some kind of cash investment.
Understanding your cash flow statement allows you to see where your business is spending money. Regularly reviewing your expenses allows you to see where your weaknesses, where you can cut costs and track your payments to suppliers.
If you’re not on top of these payments, or you don’t have the cash available, you’re risking important business relationships and even your business’s reputation. Managing your cash flow effectively ensures you’re not inundated with bills or spending cash unnecessarily.
But managing cash flow isn’t all about avoiding risks… it is also about seizing opportunity. Regular reviews of cash flow allow you to evaluate new business strategies, sales drives or promotions and adapt your business accordingly.
Timing when to invest in growth strategies will also become easier and safer, because you make better decisions and plans if you know where you sit and how much cash you have available.
Keeping on top of cash flow
If you haven’t been keeping on top of your cash flow as diligently as you’d like to, there’s no need to panic. We’re here to help with some tips for building your cash reserves.
1. Get paid
Calculating your incomings versus outgoings is an important test of your cash flow. This is the turnaround time from when you supply your goods or services, to when you receive payment.
Staying on top of your debtors is the easiest way to ensure money is flowing into the business. Invoice early, and often, to avoid chasing huge payments, or consider renegotiating trading terms with your clients. You could implement late fees to discourage late payments, or encourage early payments through discounts or promotions.
Getting cash flowing into your business is the easiest way to boost your cash reserve.
2. Cut costs
Renegotiating contract terms doesn’t need to be restricted to your clients. Reviewing your current contracts with suppliers and/or providers, and hunting for better deals or terms, can save your business thousands.
This applies to technology, too. An outdated computer system or overpriced IT software could be dwindling your cash reserves, time and resources. Consider reviewing your IT processes or have a look at what tasks can be outsourced.
Minimising the cash leaving your business – whether it be through time, resources or money – will boost your cash reserves. This will help protect your business against any unexpected expenses or economic downturns.
3. Protect your business
How you protect your business will depend on your stage of growth. If you’re a new business it is important to keep your business expenses separate from your personal expenses. This gives a more accurate representation of your business’s cash position. If you’re a more established business it is worth considering business insurance to make sure everything can keep running smoothly if something happens to you or a key employee.
4. Get help
To some, this may seem a bit overwhelming. Luckily, you don’t have to do it alone. We have teams of specialists available to help you manage cash flow in your small business.