Have you ever encountered unexplained decreases in your inventory? Do you have unpaid invoices piling up in a drawer? Or worse, do you have insufficient cash to cover your payments? If the answer to these questions is yes, you probably have a severe problem: poor cash flow management.
Cash flow management is the lifeblood of a business. Without sufficient cash flow, it's doomed to close. In this article, we review how proper cash flow management is essential to the success of any business, especially for small-scale traders.
What is cash flow?
We could define cash flow as the record of all cash inflows and outflows from your business. It is calculated by subtracting the payments made during a period from the collections of the same period. It can be calculated for the entire business, for normal operating activity, or for a specific project.
It's important to emphasize that cash flow is based on liquidity, not profit. Keep in mind that selling is not the same as collecting payments. If you sell a lot but don't collect payments, you may make a lot of profit, but your small business may close down due to a lack of cash to cover expenses.
Why is cash flow so important?
Proper cash flow management will allow you to:
- Know your liquidity: This lets you know if you have enough cash to meet your payment obligations e.g., pay suppliers, employees, rent, etc.
- Know your capacity for growth: This will allow you to understand your liquid resources so you can invest in your business, expand, and take advantage of new opportunities.
- Live peacefully and make better decisions: It gives you peace of mind and allows you to make strategic decisions without the overwhelming pressure of cash flow.
How to manage cash flow effectively
Below are some practical tips for managing and improving your business’s cash flow:
1. Make realistic cash flow forecasts
It's essential to know all your income and expenses, both fixed and variable, including sales, purchases, payroll, rent, taxes, etc. This helps you anticipate unforeseen events. Now, don't base your forecasts on a perfect scenario. Include a margin of error in your budget to cover possible unforeseen situations, such as urgent repairs or inflation. Anticipate future expenses by planning carefully and considering all foreseeable payments. Precise forecasting will help you avoid unpleasant surprises.
2. Keep a close eye on your collections
Don't wait until the end of the month to invoice; rather, issue invoices as soon as you complete a sale. If not immediately, at least invoice biweekly. For more effective tracking, you have to indicate the payment deadline on your invoices, constantly monitor outstanding collections, and proactively contact delinquent customers. Define a protocol for handling late payments from customers: the sooner you start the collection protocol, the better your chances of collecting the debt. You can offer discounts or additional benefits to customers who pay their invoices on time.
3. Optimize inventory management
Monitor your stock regularly to have an accurate view of available inventory. You can also define minimum and maximum stock levels to avoid excess inventory or running out of stock. Another way to optimize your inventory is to negotiate better payment terms with your suppliers. Longer payment terms or early payment discounts help improve your cash flow, so you want to leverage that where and when possible. Consider selling obsolete or slow-moving products to free up capital and generate additional revenue.
4. Build strong relationships with your creditors
Maintain good communication with your creditors by informing your suppliers about your financial situation per time. Pay your bills and loan installments on time to maintain a good credit rating and facilitate access to financing in the future. If you're having trouble paying your debts, don't hesitate to negotiate with your creditors to reach a workable payment agreement.
5. Optimize and rationalize your expenses
Analyze each of your expenses and look for areas where you can save. For instance, you can opt for cheaper alternatives, negotiate better prices with suppliers, or even eliminate unnecessary expenses. Look for discounts on your purchases, take advantage of offers and promotions, and negotiate better prices with your suppliers. You can also renegotiate contracts and look for better terms or cheaper alternatives.
6. Anticipate problems
As a smart small-scale trader, you have to be able to monitor your cash flow regularly by keeping track of your income and expenses to identify any worrying patterns. Stay informed about market conditions, trends, and potential changes that may affect your business. If you detect a potential problem, take corrective measures early to prevent it from getting worse.
Conclusion
Cash flow is an important strategy that can give you control over your expenses, and in planning the next steps for your business. Not having a well-structured cash flow can hinder your business's planning and even affect its financial health.
To avoid losing track of your business's cash flow or forgetting about it, always organize it at the end of each workday. Also, write down on your calendar which bills need to be paid, whether there are any outstanding debts, and whether there are any upcoming cash inflows.
Did you find these tips on how to organize your cash flow useful? Then visit our blog for more financial guides.
.svg)
