Effective cash flow for small businesses
Get your cash flowing with these 7 easy steps.
Cash flow is simple. Money flows into a business and money flows out. Essentially this is what makes a business work, so failing to manage this flow of cash is one of the leading reasons that businesses fail in the long run.
Trying to manage a business without giving your cash flow the attention it deserves is like trying to row a boat without oars. You’ll either spin around in circles or sink. So with that in mind, let’s look at how you can take your business and row, row, row your boat down the money stream.
Here are the 7 tips we’ll cover that you can start using today:
- Know your break even point
- Build up your cash reserves
- Choose the right accounting software
- Get paid on time
- Spread out your expenses
- Be smart with your payroll
- Consider external finance
Although your focus should be on managing your cash flow and not just on making a profit, it’s useful to know when your business crosses the break even point. Keeping your eye on the prize is a great indicator of how well you’re managing your cash flow.
Negative cash flow is just that. Negative. Although cash flow might not directly influence your profit margin, it sure can hurt you when you’re not doing it right.
In every business, there might come a time when you have some sort of cash shortfall. All businesses have to deal with these kinds of shortfalls, but it’s the way you handle them that will determine whether your business thrives.
How should you handle these shortfalls? Cash reserves are your friend here. Saving for a rainy day is not just advice your Granny used to hand out, it’s something that can help your business grow.
Cash flow might be simple to understand but the bigger and more successful you become, the harder it can be to keep track of everything that’s going on. Investing in quality accounting software and brushing up on your accounting skills will make managing your cash flow much easier.
There are several great software options available, so make sure you use technology to your advantage when trying to manage your cash flow. Most of the software available will give you a 30-day trial period so you can ensure you make the right choice. Here are 3 options you could consider:
- Xero: easy-to-use online accounting software that’s available anywhere, anytime, including mobile devices.
- Sage: cloud-based accounting software that allows you to manage your invoicing, cash flow, payments and VAT on all devices at any time.
- QuickBooks: popular small business accounting software since the 1990s that specialises in bookkeeping functionality.
As your business grows, getting professional advice from an accountant and going on to build an in-house finance function will be critical.
We all want to get paid for the products or services we’ve provided. And after a job well done, a client can be happy and grateful but that doesn’t always mean they’ll pay on time.
Chasing clients for payments might not always feel good and, although we want to build relationships with our clients, you deserve to get your invoices paid on time. So make that call, or send that email. You won’t regret it.
Of course, you want cash to flow into your business, but cash also has to flow out. The speed at which that cash flows out is one of the most important things to manage.
There are many expenses to keep an eye on when running a business. Budgeting, which is especially important when tracking your cash flow, and tax planning are essential in spreading out your expenses.
You need to know where your money is going and why. That way you can adjust your budget and spread out your payments so that you remain in control of how fast your cash flows out. Some expenses to watch are:
- Mortgage or rent
- Equipment and machinery to purchase or hire
- Vehicles and travel
- General maintenance
- Office supplies
- Professional fees
- Loan repayments
- Advertising and marketing
Speaking of expenses, paying salaries might be one of the highest you have to meet on a weekly or monthly basis. It pays to be smart here too. Using a payroll system that allows you to track your payments and make sure that you’re paying on time will help you manage your cash flow more effectively. It might be a high expense but we all know that it’s your employees that make your business work.
Many accounting packages, like Xero for example, have payroll management built in, so you can access your payroll at any time and keep track of cash flow.
If you think of your business as a boat, it’s safe to say that there will be days of smooth sailing and days of rough waters. So it’s important that you know what to do when your boat has sprung a leak.
External finance might just be the lifeline you need. A business loan, for example, could provide an instant cash injection to improve your cash flow very quickly. Other solutions like invoice finance bridge any gaps in your cash flow by advancing the funds already owed to you in your outstanding invoices.
MarketFinance is the first fintech business lender to offer seamless invoice finance and business loan solutions, together, in a single user-friendly facility. Find out more.