Regardless of its size, every business needs to prioritize cash flow management. This is especially true for small and local businesses, as they tend to have more limited capital and cash flow available. With steady cash flow, you will not have to worry as much about the costs of operating your business.
One of the many elements of small business cash flow management is ensuring that your customers can pay conveniently. Podium can assist with this via options like text-to-pay and terminals.
Continue reading to learn more detail about these and other cash flow management strategies.
What is cash flow management?
Before you start creating a cash flow management strategy, you must understand what the term refers to. It is simply the process of tracking the money that your business receives. You compare that incoming cash flow with your outgoing costs, such as employee salaries and bills.
As such, part of the answer to what is cash flow management is that it gives you a view of your business’s money overall. It lets you see costs versus revenue to confirm that you are currently making a profit.
Cash received refers to the money that flows into your company, while cash spent shows money that flows out. These are also called cash inflows and cash outflows, respectively.
You can also look at other elements, such as cash flow projections to better predict your company’s profits. This can also help you evaluate opportunities for growth or investment in new products or services.
Cash flow vs. revenue
When discussing managing cash flow, you may find yourself wondering how cash flow and revenue are different from each other. While both are essential metrics for small businesses to track, they provide different insights.
Your revenue is accrued. As such, you have earned it, but it doesn’t appear on your general ledger yet. By contrast, cash flow appears on your ledger on a cash basis. Importantly, cash flow includes your net income, as well as operating, financing, and investing activities.
Revenue will appear on your income statement, while cash flow will appear on your cash flow statement. Both of these are vital financial statements that you want to track in addition to your balance sheet.
To put it simply, revenue measures the sales you make. Cash flow measures the cash that your business generates from financing, operating, or investing.
You need a positive cash flow. If you have a negative cash flow, your business does not have enough cash to keep operating.
4 Ways cash flow management can help your local business
Cash flow management lets you confirm that your company is profitable and can continue operations. It also allows you to make plans for the future.
Prevent the need to use personal funds
Small businesses simply don’t have the capital or resources of larger ones. Big companies are more likely to have extra funds available in case of late payments or unexpected expenses. However, small businesses likely don’t have these additional funds, making negative cash flow extra challenging.
If your cash flow becomes negative, you need to find a way to get more capital. This comes from investing more of their personal funds into the business for many small business owners, but this is far from ideal.
Essentially, keeping an eye on your cash flow lets you prevent a situation where you need to use your personal funds in your business. That is important, as you want to keep your personal bank account separate from your business operations.
Staff and suppliers get paid on time
Another meaningful way that cash flow management helps your small business is by ensuring that everyone gets paid on time, whether your suppliers or your employees.
Paying your employees and your suppliers on time is among the most vital things to do if you want to retain them. After all, hiring and training new staff costs more time and money, and if you don’t have supplies, you can’t offer your products or services. Even if you don’t lose staff by paying them late, they are more likely to put in a lower quality of work. This can hurt productivity, customer satisfaction, and more.
Take advantage of growth opportunities
One of the most impactful advantages of cash flow management is that it helps you maintain your finances and save extra. By keeping your funds positive, you will have extra capital available to invest in new opportunities and grow your business or invest in new equipment. Maybe that means opening another office or store, or perhaps that means offering another category of products or services.
Less stress for you and your team
It is also worth mentioning that managing your cash flow reduces your stress levels as a business owner. You will have the peace of mind that comes with knowing you can meet your financial obligations. You also won’t have to worry about future cash flow problems. Instead, you can focus on offering the best products or services.
How do you manage cash flow?
We’ve gone through the importance of cash flow management; now, how do you improve your finances? The following tips should help you avoid cash flow problems and maintain a positive cash flow. You will notice that many of them focus on ways to improve your cash flow and accounts receivables instead of minimizing operating expenses.
Make payment easier for customers
One of the most important things you can do to manage your cash flow is to encourage customers to pay on time. The best way to do that is to make it easy for customers to pay.
The other element of this is ensuring that your customers can pay quickly. Don’t make them wait in long lines to pay in person or only accept payments between certain hours of the day. One good option is offering billing via text. This way, customers can pay on the go.
Tackle late payments with an incentive
While making it easier for customers to pay will help with your accounts receivable, you also need a strategy to collect late payments. Start with something simple, such as emailing or texting payment reminders.
If that doesn’t give you the results you want, try offering an incentive to pay on time. Perhaps customers can get a small discount for paying on time or early. Or maybe they will get a coupon for their next service or offer an incentive for paying before they receive the service instead of after.
Make a cash reserve in case of emergencies
As mentioned earlier, every business needs to have an extra financial reserve to provide a cushion if customers are late on payments or anything unexpected happens. Unfortunately, creating this cash reserve is much easier said than done. Remember that slowly building the reserve is better than not building one at all.
Other steps to managing cash flow
In addition to the above, you should also:
- Create a budget
- Regularly review business expenditures
- Eliminate unnecessary expenses
- Keep careful records of all finances
- Diversify revenue streams
- Be on the lookout for warning signs of negative cash flow
- Identify and prepare for risks
- Negotiate with suppliers, vendors, and customers
Why cash flow management matters to local businesses
We have already touched on some of the ways that cash flow management can help your local business. These are also the reasons that it matters to your local business. Simply put, by managing your company’s cash flow, you get all of the benefits mentioned above. This can reduce your reliance on loans from financial institutions, help you effectively manage your finances, and avoid cash shortfalls.
Using cash flow management strategies ensures that your business always has the funds it needs to pay employees and suppliers. It will reduce your stressors related to money and help prevent financial concerns for your business.