Six tips for managing your cash flow
Six tips for managing your cash flow
Effective cash flow management can empower your business to thrive during periods of economic uncertainty as expenses remain high and revenues vary. However, it can be difficult to know where to begin. These six tips can help you get started:
- Keep an eye on the future
- Control your expenses
- Monitor what you’re owed and what you owe
- Balance what you own and what you owe
- Analyze your cash flow frequently
- Consider your financial decisions
Updating your approach to cash flow management will enable your business to pay its bills on schedule, weather unexpected expenses, and invest in opportunities for further growth.
Managing cash flow can be a challenge for business owners at the best of times — but it’s especially challenging in times of economic uncertainty. Expenses stay high but your revenue may vary, making it difficult to know how much money is entering and exiting your business.
We’ve summarized six tips for managing your cash flow to help your business navigate periods of uncertainty with confidence.
What is cash flow management?
Cash flow management is the process of monitoring the money that is coming into and leaving your business. It is essential to ensure more money is flowing into your business than flowing out.
Managing your cash flow effectively enables your business to pay its bills on schedule, weather unexpected expenses, and invest in opportunities for further growth.
What are the signs of poor cash flow management?
There are several indications that a business may not be effectively managing its cash flow, including:
Struggling to pay bills
One sign of poor cash flow management is when you’re struggles to pay bills on time. This suggests you do not have the sufficient cash reserves required to meet financial obligations.
Frequent cash shortages
Poor cash flow management can lead to frequent cash shortages, creating difficulties in meeting daily expenses or unanticipated costs. This means you have to rely on credit, submit late payments, and operate ineffectively.
Difficulty securing financing
Another indicator of poor cash flow management is when you’re struggling to secure loans or credit. Lenders and investors frequently evaluate the cash flow stability of a business before extending financial support. When cash flow is poorly managed, it may raise concerns about how your business will repay its debts — resulting in lost loans or financing opportunities.
Increasing debt and interest payments
Poor cash flow management causes you to rely heavily on borrowing or credit lines to service debts and cover operating expenses. However, acquiring high levels of debt leads to substantive interest payments that strain cash flow and impact your company’s financial health even further.
Inadequate planning and forecasting
A lack of cash proper cash flow forecasting and planning may signal ineffective cash flow management. Without a full understanding of your future cash needs, your business may experience unexpected cash shortfalls or find it does not have the available funds to invest in new growth opportunities.
How to improve cash flow management
Effective cash flow management is essential to keep your business financially stable in times of economic uncertainty. It empowers you to make informed decisions, seize new growth opportunities, and achieve your long-term goals.
However, managing your cash flow can be challenging — and you may be wondering where to begin. These six tips can help you get started:
1. Keep an eye on the future
Predict how much money your business will receive and how much it will need to spend in the next several weeks and months. Planning ahead will help your business avoid cash shortages.
2. Control your expenses
Review your expenses to determine how your business can reduce unnecessary costs. This may include negotiating better deals with your suppliers or exploring other ways to save money.
3. Monitor what you’re owed and what you owe
Follow up on unpaid invoices to ensure your customers are paying you on schedule. Prioritize paying your own bills on time to avoid late fees and maintain good relationships with your suppliers.
4. Balance what you own and what you owe
Find the right balance between the money you have in hand (cash, inventory, etc.), and the money you owe (bills, debts, etc.) to ensure you have enough money available when you need it.
5. Analyze your cash flow frequently
Examine your cash flow statements to identify trends, areas when you can improve, and any potential issues before they occur.
6. Consider your financial decisions
Evaluate how financial decisions such as taking out loans or investing money will impact your cash flow. It is essential to ensure you have enough cash available to cover your daily expenses before pursuing growth opportunities.
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What does improvement look like?
Imagine a business owner has recently opened a new bakery. While its products were in demand and it had a growing customer base, the business often struggled to pay its suppliers on time, causing a strain in their relationships. Additionally, it started to rely on credit cards and short-term loans to cover unanticipated expenses — leading to higher interest payments.
The owner of the bakery recognized the need for change and decided to implement new cash flow management strategies. They got started by monitoring their cash inflows and outflows to anticipate periods of low cash flow and reduce unnecessary costs.
The bakery also began to send friendly invoicing reminders to customers and implemented a follow-up system to ensure prompt payments. Additionally, the owner reduced excess inventory to free up more cash, reviewed cash flow statements to identify patterns such as seasonal fluctuations in demand, and planned for anticipated cash shortfalls or surpluses.
Through these changes to its cash flow management strategy, the business reduced its reliance on credit and ensured it would always have enough cash available to cover its expenses. This improved its relationship with suppliers and attracted new customers through its reliable service, empowering the bakery to thrive.
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