Cash flow management is one of the most important aspects of running any business. In some ways, managing cash flow is even more important than making a profit.
Good cash flow techniques can keep you afloat through even the most trying of times, while bad cash flow management could leave you struggling even while making a profit.
All in all, it’s a very good idea to learn effective cash flow management techniques. So read on for six tried and tested cash flow management strategies.
Article Shortcuts:
- Why Is Cash Flow Management Important for Small Businesses?
- 6 Strategies for Effective Cash Flow Management
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What Is Cash Flow Management?
Cash flow management is all about tracking the money coming into and going out of your business. A good cash flow manager will compare the money coming in with outgoings like bills, payroll, etc.
They will then strategically save, divert, or invest funds in such a way as to make sure that all necessary funds are available when needed.
To give an example, if you have a lot of money coming in in the middle of the month and a lot going out on payroll processing at the end of the month, a good cash flow management and budget strategy for small businesses would be to divert income into your salary account when you get that middle-of-the-month windfall.
Why Is Cash Flow Management Important for Small Businesses?
If you’re a solopreneur or running a small business, it’s likely that your income won’t be regular, and an hourly to salary calculator won't help you like it would someone on a fixed-term contract.
Funds will arrive in a disjointed manner here and there throughout the working month as you book jobs and send out invoices. For quicker invoicing, you can use invoicing software from Billdu.
This means that, without effective cash flow management, you risk periods where you will have limited funds to tide your business over until the next payment.
This could result in problems like late payments, incurring debts, or even bankruptcy in the long term.
Good cash flow management will make sure that available funds flow evenly throughout each working month. But that’s not all. Cash flow management techniques can also:
- Help you to predict future sales patterns
- Give you a complete picture of your costs: revenue situation
- Pinpoint opportunities for investment
- Help you to make sure your ecommerce accounting is accurate
- Identify areas where you can cut back and make savings
6 Key Strategies for Effective Cash Flow Management
- Create a projection of your future cash inflows and outflows
- Track your cash flow regularly using the appropriate tools
- Offer discounts to encourage early payments from customers
- Build up an emergency fund to cover unexpected expenses
- Outsource non-essential tasks to free up your time and resources
- Review your pricing strategy to ensure it covers all expenses
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Now that you understand why cash flow management is important, let’s take a look at how you can manage your cash flow effectively:
1. Create a projection of your future cash inflows and outflows
In order to manage your cash flow, you need to understand its patterns. So, dive into your accounts and analyze your cash inflows and outflows. Look especially for:
- Regular scheduled payments to your company from clients, tax credits, etc.
- Regular scheduled outgoings, such as subscriptions, taxes, payroll, etc.
- Irregular payments, i.e., payments that come in at different times each month
- The frequency of unexpected expenses, such as repairs
Remember, for the purposes of cash flow management, the timing of each payment in and out is just as (if not more) important as the amounts.
The aim is to space out incomings and outgoings in such a way as to ensure that the right amount of money is available at the right time, every time.
2. Track your cash flow regularly using the appropriate tools
Tracking your cash flow can be a tedious task without the right tools. Luckily, there is plenty of great tech out there to help.
For example, good small business payroll software will automatically track your payroll expenses and give you detailed reports whenever you need them.
This streamlined process not only saves time but also ensures accuracy in financial record-keeping, a crucial aspect for any business looking to thrive, as emphasized in this article on Better This World.
Similarly, you can use an ERP system to monitor your resource usage, including things like delivery and payment patterns from suppliers.
You can even centralize all of this information with tools like CRMs and accounting platforms. This lets you combine all the relevant information to generate reports and analyses on your cash flow patterns in seconds.
Additionally, you can also use travel management booking to streamline things like fuel, public transport tickets, taxi rides, etc.
If you think that you’re too small to invest in tech like this, think again. The right software can make a huge difference to your cash flow tracking, even if you work alone or have just one employee.
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3. Offer discounts to encourage early payments from customers
If your business relies on regular payments, it may help to offer discounts for earlier payments. While you may end up getting paid less, the earlier payment may be a big help in cash flow terms and ultimately save you money.
For example, if you have lots of subscription payments going out in the middle of the month and no payments coming in, offering discounts to your customers if they pay you early could quite literally pay off.
Payments coming in to coincide with direct debits going out will help you avoid late payment fees, which is better for you in the long term than getting the original, undiscounted payment at a later date.
If you operate on a fixed subscription billing basis, this strategy may be harder to implement.
On the other hand, you may find yourself more able to stagger subscription payments throughout the month than companies that work on a more traditional invoice/payment system.
4. Build up an emergency fund to cover unexpected expenses
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Insurance can take you a long way when it comes to unexpected expenses, but insurance does not cover every unanticipated cost your business may encounter. Things like audits can come out of nowhere and be expensive for your business.
The SOC 2 audit cost, for example, can rack up quickly as various systems and operations are taken apart and examined.
So, whenever you can, put money into an emergency fund. You can also invest your money in stocks, bonds, and other assets after conducting thorough fundamental analysis and market research. This can provide the business with an additional source of income.
Also, make strict rules regarding what constitutes an emergency so that you don’t end up depleting your emergency fund for frivolous reasons.
5. Outsource non-essential tasks to free up your time and resources
Hiring third parties to carry out work for you sounds counterintuitive when you’re trying to save money, but in fact, it can be a huge boon for your cash flow. For example, you can take outsource web development.
Outsourcing or automating non-essential tasks frees up a huge amount of time, which in turn lets your staff concentrate on more profitable work. It also makes sure that more of your own resources are available at any one time.
For example, opting for a business VoIP system could give you a huge amount of new communication options without the strain of having to install your own hardware network.
Dedicated companies also tend to offer the very best security systems, tools, support, and automation, which takes a lot of responsibility off your plate. It also means you don’t have to pay huge amounts to fix it yourself if things go wrong.
Ultimately, outsourcing wherever you can will usually work out a lot more cost-effective than running everything yourself.
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6. Review your pricing strategy to ensure it covers all expenses
While good cash flow management can be a huge help with financially sustaining your business, there is no way to operate a business that spends more than it makes for a substantial period of time.
If your cash flow analysis reveals that your expense management strategy isn’t cutting it, it’s time to review your pricing.
While lowballing can be a good way to bring in customers, if it’s not viable in the long term, you’ll ultimately do your business more damage than good.
Don’t be afraid to raise your prices to sustainable levels. Remember, customers will happily pay for a good product and good service.
Conclusion: Cash Flow Management: The Key to Financial Stability
Cash flow management is vital for keeping your finances stable. Bad cash flow management has sunk even the most high-flying businesses, while plenty of smaller operators have used good cash flow management techniques to climb to the top and stay there.
By using these six cash flow management strategies, you can keep your finances stable and your business running smoothly. Best of all, you won’t have to worry about funds not being available when you need them.
