The ability to manage cash flow is vital for the success for your business. Cash is king, and you need to have a good handle of your inflows and outflows. In this way, you will know whether you have enough cash on hand to pay expenses and invest in your business.
As such, your cash flow statement is more important than your income statement. However, more businesses focus on profits instead of cash. While being profitable helps your cash position, sometimes there are businesses which are profitable and never have enough cash on hand.
In effort to help you achieve a stable and consistent cash flow, we have outlined five insider tips. Following these tips will not only give you a better handle on your cash position but will also give you a better understanding of how to run your business.
- Clear Payment Terms
In the simplest of terms, cash flow is inflows (i.e. sales) minus outflows (i.e. expenses). Whilst this sounds like profitability, it is not the same. Cash flow takes into account your cash position at any given time. Well-run businesses have good cash positions and a key part of this is setting clear payment terms with your customers. To do so, you need to make sure that all of your invoices clearly state the amount due, the due date, and the penalty for late payment.
- Invoice Quickly and Correctly
A bird in hand is worth two in the bush. Just because you have delivered to your customers does not mean you are going to get paid. It is up to you to make sure you invoice quickly and correctly as any delays will impact when you are going to get paid.
Also remember the first tip! Make sure your invoice is easy to read and when in doubt, reach out to your customer to make sure they received the delivery and the invoice. Use this as an opportunity to continue the conversation with your customer, while making sure you will get paid.
- Always Keep Tabs on Your Cash Position ? Always!
Regardless of what accounting software you are using, you want to make sure that you always know what your cash position is. Its not enough to know how much money you have in the bank – though it helps. You want to make sure you are up-to-date on entering bills from suppliers and have a good handle on what orders are about to ship and which invoices are still outstanding.
Doing so will give you a better idea of how much cash you have on hand, how much you need to pay suppliers, and how much you should be getting paid from your customers. This is vital as you can’t accurately budget if you don’t know this information. While profitability is important, having enough cash to pay for all of your expenses is even more so. As such, you want to make sure you are always aware of your cash position always!
- Establish Relationships with Trusted Lenders
Think of lenders as your money suppliers. In many ways, this is your important raw material.
You wouldn’t run a bakery without having a good flour supplier. So why would you run any business without having a connection with a money supplier? Help from a trusted lender can be just the thing when you need to balance out your cash flow.
One way a trusted lender can help is by providing a working capital line of credit. Unlike a loan, a working capital line is a revolving instrument which allows you to use only the amount you need at any given time. Once you have paid down the balance, you can use the line for future purposes. This can be a great tool as it helps you to smooth out shortfalls in your cash flow cycle.
- Profit is Important, but Managing Cash is More Important
This might sound a bit confusing. How can you stay in business when you are not profitable? While it is difficult, it is possible. However, if you don’t manage your cash flow wisely, you wont be able to stay in business for long.
For a small business, the best advice is not to focus on profit forecasts for years in advance. Instead develop a solid plan to manage cash on a daily, weekly, monthly, and quarterly basis. Doing so will help to ensure you have the funds you need to remain in business for years to come.
Now that you know how to achieve a stable and consistent cash flow, keep these steps in mind when handling the finances at your business. Knowing where your business is at financially can help when making critical decisions.