Cash flow is the lifeblood of your business. Think of it as
If more money is coming in than going out during a period of time, your cash flow is positive meaning you’ll have enough money available to pay all your business expenses. If more cash is going out than coming in, your cash flow is negative, which means you will need to find money to cover your costs. This is one main reason why most small businesses (especially new ones) usually need capital in the form of a loan to cover shortages in their cash flow.
Let’s take a look at the reasons why your business’s cash flow is important, and how you can improve it.
But first, let’s get something straight: Positive cash flow DOES NOT mean Profitability. The two terms are closely related but are not the same.
Positive cash flow — as mentioned above, it means more money is coming into your business than is going out. It turns out that your business actually can be profitable without having positive cash flow.
Profitability — your profit is what you have left over after all your expenses are paid. Are your revenues greater than your expenses? If so, it means you made a profit for the year. Chances are at some point during the year, your business experienced negative cash flow.
Why is understanding and managing your cash flow important?
There’s a famous saying that goes: “revenue is vanity, cash flow is sanity, but cash is king.” In short, cash flow is as important to your business as blood to your body or fuel to your car. There are several reasons why understanding and managing your cash flow is important for your business’ health and success. Let’s discuss 4 important ones:
1 – It’s more accurate than a budget
When you manage your cash flow properly, you are actually receiving a more accurate read of your business’ financial health. Your business’s budget is an estimation of what your business will need to spend, save, and sell during a given period of time, while your cash flow tells you exactly what your business is spending and earning.. You can use this cash flow forecasting template [insert link for template] to help keep track of where your money is coming from and where it’s going. Don’t forget to regularly maintain and update this document.
2 – Helps you predict when cash will be tight
If your small business is seasonal, you will notice a fluctuation in your cash flow. Your cash becomes tight during a few months of the year, right? When you manage your cash flow properly, you can prepare for this and avoid coming up short in cash. You may want to consider applying for a short-term loan for this purpose.
3 – Increases creditworthiness with lenders
When you apply for a small business loan, the lender will check is the health of your business’ cash flow. This should come as no surprise to business owners, since lenders want to make sure your business has the available cash to make your loan payments. Once you demonstrate that your business can properly manage its cash flow, they are more likely to trust you and provide you with capital.
4 – Provides the opportunity to grow your business!
When your business makes profit, part of it goes back into the business to help it grow. But even if your profit and loss statement indicates that you made a profit, you might not have it in hand.
So, it’s important to keep an eye on your cash flow and prioritize keeping it positive. This way you will know exactly how much cash you have on hand, how much is coming in and how much you should put aside for your business’s growth.
How to improve your cash flow
By now, you’ve probably realized how important cash flow is to your business, and that you’ll need every tool and strategy possible to optimize it. There are a number of ways to improve your cash flow. Let’s take a look at some of them:
Create a cash flow forecast
A cash flow forecast will give you a realistic estimate of how much cash is going in and out of your business and how much you are left with after all expenses are paid. It highlights and predicts your cash cycle on a monthly or yearly basis. Even though it is not a precise forecast, it will still provide you with a prediction if you ever have a cash shortfall. This way you can take measures to negotiate payments with suppliers or even apply for a loan.
Send invoices quickly
To put it simply, you can’t get paid if you don’t send invoices. So it’s best to stay on top of invoicing your customers. If you are currently having issues with your invoicing process, consider using
Prompt customers to pay invoices on time
Remind your customers when their invoices are due. You can send them email reminders a few days before, on the day of, and a few days after the invoice is due. If you don’t hear back from them, give them a call and send them another reminder. You can also provide your customers with a discount if they pay their invoices on time. An incentive could be in the form of a small discount. It encourages them to pay their invoices faster which means you get cash faster.
Come up with strategies to increase sales market
The more you sell, the more money you receive. Consider implementing an aggressive marketing strategy to help you achieve this goal. You can do this in many different ways. For instance, you can add new products or services to your current business. If you operate a coffee shop, consider offering homemade lemonade during summer time. If you have a large enough office space, you can rent it out for parties and other events on weekends when not in use.
Apply for a small business loan
Another option is to apply for a short-term business loan. A lender gives you a sum of money, where you have to repay in regular installments over a short period of time. The prospect of owing money may sound kind of scary but there are several great benefits to it. It will help you cover holes in your budget and will ensure that you are able to purchase equipment or fill up your inventory.
Ultimately, cash flow is the blood of your business and you need to keep it flowing both ways. All these tips will help you manage and increase your cash flow. No matter which strategy you decide to choose to make your cash flow positive, you’re on the right path to growing and running a successful business.