It's no secret that cash flow is the lifeblood of any organization. Yet for many small business owners, this is one of the most challenging aspects of running their business. There are several reasons why cash flow management can be difficult; from a lack of understanding about what cash flow actually is, to poor decision-making when it comes to managing finances. Getting cash flow management right, however, can improve every part of your business – from your ability to attract investors, to increasing your bottom line. In contrast, not managing it well can have a number of negative repercussions, such as not being able to pay bills on time, an inability to make payroll, and difficulty in growing or expanding your business.
Here are five ways SMBs can implement today, to better manage their cash flow:
Keep accurate financial records
This may be stating the obvious, but you'd be surprised how many small business owners don't keep track of their income and expenses. To get a clear picture of your cash flow, you need to have accurate financial records that show how much money is coming in and going out. This will give you a good starting point for making decisions about how to best manage your cash flow.
Know your business's cash flow cycle
The cash flow cycle is the time it takes for your business to receive payment from customers after you have made a sale. This can vary depending on the type of business you're in and the payment terms you've established with your customers. For example, if you're selling physical goods, there may be a delay between the time of the sale and when you receive payment. Understanding your business's cash flow cycle is critical to managing your organization's finances.
Stay on top of your invoices
One of the best ways to improve your cash flow is to make sure you're staying on top of your invoicing. This means sending invoices out as soon as a sale is made and following up with customers who are late in paying. If you're not invoicing regularly, it can take longer to receive payment, which can negatively impact your cash flow.
Be disciplined with expenses
When it comes to managing cash flow, it's important to be disciplined about expenses. This means only spending money on things that are necessary for the operation of your business. Another useful strategy related to business expenses is to spread them out over time. For example, if you know you need to purchase new equipment, try to negotiate payments with suppliers rather than making one large purchase all at once.
Be smart about payroll
Payroll is another area that can help SMBs manage cash flow. One way to do this is to be strategic about when you're paying employees. For example, if you have the option to pay employees bi-weekly or monthly, choose the option that will help you better manage your cash flow. Direct deposit is also a good option for small businesses as it can help to reduce the amount of time it takes for employees to get paid.
Running an SMB is no easy task and managing cash flow is just one of the many challenges faced by small business owners. However, by taking the time to understand what cash flow is and implementing some simple strategies, you can make a big impact on your organization's bottom line.