Your business may be profitable, but poor cash flow could still signal trouble. Take steps now to get the cash flow tap flowing.
It may not seem like cash flow management could make or break your business, but it’s one of the most common reasons why businesses fail.
Business experts routinely describe cash flow as the lifeblood of a small business. Business owners may reason that as long as sales are good and they’re turning a profit that things are just fine. But the reality is that even if your business is profitable, poor cash flow management can hinder your success. It may not seem like cash flow management could make or break you, but it’s one of the most common reasons why businesses fail.
What is cash flow?
Put simply, cash flow is the amount of money you owe, how much money is owed to you, and how much money you have in the bank.
Five tips for managing cash flow
Because cash flow is such an important component to a healthy business, consider these strategies for improving cash flow and strengthening your business.
- Keep sufficient cash reserves. In personal finance, experts advise having enough money in savings to cover three to six months of household expenses in the event of a job loss or unexpected emergencies. Likewise, it’s advisable to have a similar three to six month cash reserve to help your business cover slow times or other unforeseen circumstances.
- Keep inventory lean. You may be ordering more than you need just because you get a volume discount. It’s important to have sufficient inventory on hand to fill customer orders without notable delay, but excess inventory is a drain on the budget. Weigh the costs of discounts or other purchasing incentives against the cost of having idle inventory and order only what you need to serve your customers.
- Run a tight ship with invoicing and collections. Unless your business exclusively requires payment at the point of sale, you’ll have to bill customers for your products or services and then make sure they actually pay you. Be diligent about doing both tasks on a regular and timely basis to keep your cash flow strong. Getting the sale and actually doing the work are likely what interest you the most -- and rightfully so -- but you won’t make money unless the client pays you. Keep careful records of your billings and follow-up on unpaid invoices. It may feel uncomfortable to pressure your clients to pay, but you provided a product or service in good faith and it’s reasonable for you to expect clients to pay your for your work.
- Control costs. Even when you’re making sales, don’t get sloppy with your outgo. Be sure that every expenditure -- for supplies, inventory, salary and other costs -- is a necessary expense that ultimately contributes to the health of your business in some way.
- Extend credit with caution. If you will allow clients to pay for your product or service over time, you may want to have a credit approval process to ensure clients can pay their bills. An alternative may be to take credit cards. You’ll pay the vendor a percentage of your sales, but you’ll have the money upfront, which saves you time in processing invoices and doing collections.
By carefully monitoring your cash flow, you’ll have a healthier business that is prepared to withstand the ups and downs of the marketplace.
Kelly Burkart is a freelance writer from Minneapolis, Minn. While she has spent most of her time writing about financial services the past 15 years, she has also explored and written about everything from cardiovascular health to travel, higher education and sustainable energy practices.