You hear a lot about profit in business, but profit alone doesn’t equate to success, especially if you don’t manage your cash flow properly to improve your cash position. In fact, cash flow issues are one of the primary reasons small businesses fail. While your business may appear profitable on paper, if you don’t have enough cash to replenish inventory or pay operating expenses, it could easily fail.
Cash flow is the movement of money in and out of a business. Positive cash flow indicates a financially healthy company; negative cash flow suggests the business will need financial support (aka financing) to sustain itself. While revenue and expenses are important, it’s the efficient movement of cash that maintains operations.
When you have a positive cash flow, it means you have enough cash on hand to meet all your financial obligations, both the expected and the unexpected. A cash flow surplus can be set aside as a safety cushion during a downturn in business—or reinvested into the business for long-term growth. In short, the optimization of cash flow empowers you to navigate financial obligations easily and take advantage of opportunities.
You want the money coming into your business to arrive as quickly as possible. There are ways to make that happen, from using automation to streamlining your payment processes to providing incentives for customers to pay you quickly. Here are some best practices:
Build strong relationships with your vendors so you can negotiate favorable payment terms and discounts, as well as flexibility during cash flow fluctuations.
Use an automated payment system to make it easier and more efficient for customers to pay you. With automatic payments, you'll know exactly when payments will be processed, which will help keep cash flowing and allow you to plan ahead. Also, automated payments are more secure and cost-effective when compared to paper transactions.
Give your customers incentives, such as discounts or rewards, to pay you quickly—and be sure to send out your invoices immediately after the sale to expedite the process. Conversely, provide penalties for late payments.
Look at your spending and trim unnecessary costs. Maybe you have unused office space or a surplus of inventory. Maybe you need to reevaluate your marketing spend. Just like your personal spending, it’s important to set a business budget and stick to it. Small expenses can add up to be a huge drain on your cash flow.
Too much inventory ties up your capital, while not having enough creates missed sales opportunities. Strive to find the right balance. Digitizing your inventory management could help you stay in that sweet spot.
Business credit cards are a popular tool for handling everyday expenses, allowing you a month to pay them off. This flexibility can be especially useful for seasonal businesses.
Get immediate access to capital through a working capital line of credit or a business loan. These financing options help you cover seasonal downturns or quickly take advantage of a business opportunity.
See at a glance when you will have a surplus or a deficit of cash in your account, based on historical data and patterns. This data will guide you in paying expenses.
Improving your cash position isn't just a matter of profit—it’s a fundamental aspect of sustaining and growing your business. By taking proactive steps like automating payments, encouraging timely payments, and managing inventory wisely, you can ensure a steady flow of cash. This not only helps in meeting immediate obligations but also positions your business for future opportunities and growth. Don’t leave your success to chance. Contact Our Business Team to explore strategies for optimizing your cash flow and securing your business's financial health.
