I’m a business expert – here’s how to manage your cash flow as a small business
Thomas Stanwell, client executive at Hexagon Cards, explains the importance of cash flow and how to manage it as a small business
As a small business, managing cash flow is vital for your success. Knowing how much cash you have coming in and going out gives you an invaluable understanding of the health of your operations and ensures you can pay your bills on time. Yet managing cash flow can be challenging — especially for new business owners who aren’t sure where to begin.
Understanding cash flow
Cash flow is the movement of money in and out of the business. This includes the inflow of revenue from sales, investments, or loans, as well as the outflow of expenses such as salaries, rent, utilities, and other operational costs. Maintaining a healthy cash flow ensures that a business can meet its financial obligations promptly while also having sufficient funds for growth and expansion. Many successful businesses can become stilted due to not managing cash flow properly.
Importance of cash flow management
Proper cash flow management is vital for the survival and success of small businesses for several reasons. Firstly, it ensures that the business has enough cash on hand to cover day-to-day expenses and unexpected costs as well as debts when they fall due. This is crucial for maintaining a positive cash flow which demonstrates financial stability to stakeholders, including suppliers, investors, and lenders. Lastly, an accurate cash flow forecasting allows for informed decision making regarding things such as investment and growth.
To tips for managing cash flow:
- Develop a ‘cash flow forecast’: Create a detailed projection of anticipated cash inflows and outflows over a specific period, typically monthly or quarterly. This forecast provides insights into potential cash shortages or surpluses.
- Monitor and analyse regularly: Continuously track actual cash flow against forecasted figures. Identify discrepancies early and understand the underlying causes so you cant take action before it becomes a bigger issue.
- Negotiate payment terms with suppliers: Negotiate favourable payment terms with suppliers to extend payment deadlines without incurring penalties. This flexibility allows better alignment between cash inflows and outflows.
- Control expenses: Regularly review and prioritise expenses to identify areas where costs can be reduced without compromising quality or efficiency. Consider renegotiating contracts with vendors and exploring cost-saving alternatives.
- Build emergency reserves: Set aside a portion of profits as emergency reserves to cushion against unexpected expenses or revenue fluctuations. Aim to maintain a cash buffer equivalent to at least three to six months of operating expenses.
- Explore financing options: Evaluate various financing options such as business loans, lines of credit, or invoice factoring to bridge short-term cash flow gaps or fund growth initiatives. Compare interest rates, terms, and repayment schedules to choose the most suitable option for your business.
Implementing these strategies early on is the key to having a solid grasp on your cash flow. It will allow the business to grow steadily and make sure that any expansion of the business doesn’t run away with you. Once it’s all planned out, it won’t feel as daunting of a task.
