Small businesses across the world struggle to meet up with maintaining their liquidity rates, this fact is more so when the small business seeks expansion. With thousands of competitors out there, a business must bring its A-game to secure a spot on the global scene while maintaining the best products and services for its customers. One such way small businesses can leverage the ever-competitive business environment is by maintaining a stable cash flow in their organization to let it have access to the needed financing for its activities.
This article offers all there is to know on the management of cash flow by small businesses.
What's in this guide?
Understanding cash flows
Cash flows are the general movement of money from the company, which in turn affects the business’s liquidity. The term is referred to the total amount of money and money equivalent taken in and out of the business. When cash comes into the business, such is referred to as an inflow, when cash goes out of the business, then it is an outflow.
Generally, investors look at how a business can maintain its cash flows before putting their money into it. The possibility of a business maintaining its cash flow is the value the shareholders and the general business community see in it. The cash flow also shows the general health and strength of the business and is often an indicator of the capacity at which the business is growing.
Small businesses must manage their cash flow to remain stable and grow. Good cash flow management helps organizations meet their financial obligations, engage in potential development opportunities, and deal with unexpected challenges.
How small businesses can manage cash flows
A small business would always want its cash flow to be effective. To know a successful business, the cash inflow should ordinarily surpass the cash outflow. Here are some key techniques to follow to manage cash flows as a small business.
1. Understand the cash flow cycle of the business
This is perhaps the most vital of the list when seeking to manage cash flows as a business. The step begins with business owners figuring out methods to establish the cash flow and inflow timing of their business.
For instance, if the business’ cash inflow comes from sales, investments or loans, the business can categorize and monitor their development by placing them side-by-side with cash outflows, which include operational expenses, inventory purchases, salaries, and loan repayments. Getting a grip on the activities that influence the cash flow of a small business assists the owners to foresee and plan for potential shortfalls or surpluses in the business.
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2. Track and predict financial flows
Having a grip on the cash flow structure of a small business demands that the business owners take control of how and when the cash flow increases or has a significant change. This can be achieved in varying ways, which include having accurate cash flow forecasting for effective management of a small business’ cash flows. Business owners can establish a monthly or quarterly forecast of predictable cash inflows and outflows that can offer them leverage in the cash flow development of the business.
The historical data, industry trends, and current market circumstances are effective methods that have proven to offer trustworthy projections on the cash flow predictability of a business. Business owners must compare, regularly, the business’ actual cash flow with their projected outcomes to figure out the level of discrepancies. Closely monitoring the business cash flows allows business owners to take remedial steps as soon as possible and make educated decisions regarding investments or cost savings.
3. Accelerate cash inflows
Accelerating cash inflows in a business is sure to maintain a stable cash flow system. This is because, the higher the cash inflow, the better it is for the success of the business.
To maintain cash inflow, businesses must employ a certain strategy that ensures an effective strategy that can provide a certain increase in revenue collection over time. These are:
- Invoice promptly: often send invoices for services done at the appropriate time possible. This lets cash inflow engage continuous and steady growth. Offer specific payment conditions, due dates and relevant contact information for billings to clients and customers to make prompt payment for the services rendered. With this culture in place, the business’s cash inflow is bound to be on a steady rise.
- Offer incentives for timely payments: everyone loves giveaways, so why not leverage them by offering incentives to clients and customers that make timely payments for the products or services delivered? This strategy increases both cash flows and consumer relationships in small businesses.
- Employ electronic payments: electronic payments offer timely and easy payment solutions to small businesses. The acceptable digital payment methods that small businesses can follow include credit card payments, mobile payment, internet banking and other payment solutions. These unique electronic payment solutions improve the overall experience of clients and can cause increased cash flows to the business while accelerating financial inflows.
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4. Set up an emergency fund
Maintaining an emergency fund as a small business is vital to maintaining a stable cash flow. Small businesses can adopt this method to avoid or deal with unexplained or unforeseen events that are bound to affect the activities of the business.
Business owners can adopt this strategy by setting aside a part of the business savings as a safety plug for emergency situations, this emergency fund can be used to reverse unanticipated expenses that can affect the overall success of the business.
Conclusion
Small businesses must successfully manage their money flows if they are to succeed. Understanding the business cash flow cycle, forecasting and monitoring cash flows, accelerating cash inflows, controlling cash outflows, establishing an emergency fund, maintaining strong lender relationships, and engaging in cash flow forecasting and scenario planning are all ways to effectively manage your small business’s cash flows.
Employ these strategies to maintain stability, promote growth projects, and deal with any unexpected financial challenges that may arise.
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Frequently Asked Questions
Should I create a relationship with lenders to maintain cash flows?
Most likely, as a small business maintaining a strong relationship with lenders can offer additional liquidity to the business through loans.
Is the management of cash outflows essential to cash flow management?
Yes, establishing a defined cash outflow mechanism is essential to cash flow management for small businesses.
