Tips to maintain a positive cash flow for small businesses
Starting and running a small business is hard work, there’s no doubt about it. While it is important to spend time building your brand and growing and maintaining your client base, it is also imperative to your long-term success to sustain a positive cash flow within your business. Afterall, without cash flow, you won’t be around long enough to worry about those other things.
When it comes to the financial management of your business, cash is king! One of the most common mistakes small business owners make is to place other business goals ahead of their company’s cash flow. A positive cash flow is a good indication of a healthy and successful company and is vital to the survival of your business.
We recommend that you regularly review your business’s cash flow statement so that you know where you stand and, from there, you can take the necessary steps to prevent a negative cash flow.
Having a positive cash flow means you’re bringing in more money than you are currently spending on any given day. No matter the size of your company, a positive cash flow is the lifeblood of your organisation and is a crucial ingredient for growth.
Now that we’ve established how important it is to have a positive cash flow, here are some tips to help you maintain a positive cash flow within your small business.
Understand what you are spending
The first step when it comes to maintaining a positive cash flow is understanding. You need to understand how much money is required to keep your business running each month, that there are risks and unpredictable or unforeseeable expenses ahead of you and you need to be aware of your cash inflow and outflow.
When it comes to managing your cash flow, being proactive is imperative. Keeping accurate accounting records allows you to build a forecast for your business based on past results. We recommend that you create a clear budget as well as spending goals to determine the funds required to cover your expenses. Go through your spending report carefully to see if anything can be trimmed down so that you can reduce the amount of money going out the door each month.
Something that should be considered in your budget is the risks that are involved in running a small business. You need to have positive cash flow available for any challenges that may come up such as a big order coming in or a big order being cancelled or if an important client or customer, who still owes you money, goes missing. This kind of risk analysis should become part of your cash flow budgeting.
Stay on top of your receivables
One of the most crucial things you need to manage closely, to maintain positive cash flow in your business is your receivables.
This can be done by keeping a detailed debtors list. A smart move is to put a follow-up system in place, alongside this list, to chase late payments.
Time is of the essence when it comes to following up on overdue debtors. Experienced business owners will agree that the longer you remain out of contact with a client or customer, the less likely you are to collect the outstanding or arrears amount. So be sure to contact your clients or customers promptly and arrange the quickest payment of their overdue accounts, rather than longer 60-90-day payment plans. You could even offer settlement discounts to customers who pay their bills promptly.
Another consideration is how easy are you making it for your clients or customers to pay you? Offering a variety of payment options will make it easier for your clients or customers to pay you on time.
Avoid discounts – bundle instead
A great way to boost your positive cash flow is to increase per client spend. Many companies try doing this by offering discounts on products or services, but we have an even better strategy to recommend: bundling your products or services to add value.
We know it can be tempting to offer large discounts to potential clients or customers in an effort to gain their business. However, this strategy can be detrimental to your cash flow by reducing your profit and devaluing your service. Instead of offering discounts, try bundling.
By creating bundles of products or services, you can inject tremendous value into your offerings for a very low cost. Consider bundling products or services that add convenience or solve problems for your clients or customers.
We know running your own small business isn’t easy, there are a lot of challenges that you face on a daily basis. However, building and keeping an adequate cash flow provides maximum opportunity and flexibility, allowing you to sleep soundly at night.