Cash is king for businesses. Every business needs a healthy cash flow to remain profitable and stand a chance in the competitive marketplace. Of course, just like with personal finances, cash isn’t always plentiful. Running a business is expensive, no matter the size. However, smaller businesses are faced with more monetary concerns due to limited resources and funds.
To stay afloat, small businesses must keep a close eye on their cash flow. Cash flow is the movement of money into and out of a business. When someone purchases a product from your site, you make money. And when you need to pay the monthly office rent, you lose some money. It’s important to note that cash flow doesn’t mean profits. A business’ profits include all revenues and expenses. Alternatively, cash flow only looks at cash moving in and out of the business.
There are the main categories of cash flow: operating cash flow, investing cash flow, and financing cash flow. Operating cash flow refers to money going in and out due to day-to-day business activities, such as selling products and paying employee salaries. Investing cash flow is buying and selling long-term assets, like real estate. Financing cash flow includes all transitions that fall under financial institutions, like getting a loan to start your business or paying interest. These three categories will all be included in a cash flow statement, which provides a comprehensive overview of what is going in and out of your company at any given time.
With a basic understanding of cash flow under your belt, here are three best practices for managing your company’s cash flow.
1. Forecasting
Cash flow forecasting is the first step to having a better sense of how the business is really doing from a financial perspective. This is essential because knowing what’s just around the corner will help you make more informed business decisions. Also, having an accurate cash flow forecast will enable you to either reel in the spending or invest more in the future of the company. It may not be the right time to launch a new influencer campaign if you’re having a difficult time keeping products on the shelves, for example.
For the most accurate projections, it’s a good idea to use trusted accounting software. This software will provide real-time income and expense information. When a user makes a new purchase or signs up for a subscription, the information will automatically be updated in the software tool. When a vendor issues an invoice, the deduction will be seen immediately. This real-time visibility allows you to monitor your position at any given time, ensuring your cash flow balance is error-free.
2. Inventory Management
Inventory management is another key functionality for managing your company’s cash flow. It includes every aspect of goods, from making the product to storage to distribution. Having a clear sense of what your audience wants and when they want it is key to proper management. Holding onto too much or too little product is equally problematic.
For one thing, products sitting in a warehouse for months waiting to be sold are only hurting your cash flow. Each day they sit, you’re losing money and reducing your revenue. While it’s tempting to launch “new and improved” products every so often, it’s also important to take inventory of what you currently have. Launching a deep discount or offering a “buy one, get one” offer on certain products can help you move merchandise and allow for new items to come in.
And yet, on the other hand, too little of a product is a direct loss of sales. Customers want what you offer, but are unable to get it. They may turn to competitors who have similar products or offerings or they may lose trust in your business going forward. This can greatly impact your cash flow as you’re producing goods without necessarily having the current funding to back it up.
3. Negotiate
Everyone likes the feeling of getting a good deal. It’s a sign that what you’re receiving for the offer is mutually beneficial. Getting the best deal that you can for your organization can significantly improve your cash flow.
This starts with negotiating. If you have vendors that you’ve used for a long time, you may be surprised that they are willing to offer you a discount. They know they can trust you for future needs and may be more adaptable in providing the same service or goods for less. If you’re using new vendors, conduct some market research to see what the going rate is for certain goods. Having this competitor pricing on hand may sway the vendor to go with your terms.
What you negotiate is up to you. Longer payment terms can free up needed cash to pay employees their salaries. Flexible payment plans can ease pressure on when bills are due, spreading them out across several months as opposed to an upfront payment. And reduced costs altogether can greatly reduce your expenses. Negotiating may not be easy, but remember that you’re the client in these situations and vendors want to work with you!
Conclusion
Managing your company’s cash flow starts with knowing how your business is doing. Having a real-time sense of what is going in and out of the company’s bank account helps you make informed decisions. A healthy cash flow means that your business is running smoothly and efficiently, capitalizing on what you bring to market and how you get it there.
Kyle Lewis is a seasoned technology journalist with over a decade of experience covering the latest innovations and trends in the tech industry. With a deep passion for all things digital, he has built a reputation for delivering insightful analysis and thought-provoking commentary on everything from cutting-edge consumer electronics to groundbreaking enterprise solutions.
