Good ways to manage your business’s cash flow

Money is the most important thing for any business. Even the most successful businesses can go out of business if they don’t have a steady, predictable flow of it. This is where good cash flow management strategies come in. Managing your money well isn’t just about keeping an eye on it as it comes in and goes out. It’s a proactive way to keep your finances healthy so you have enough money to pay your bills, invest in growth, and deal with unexpected problems. This guide goes into great detail about the tools and strategies you need to get a handle on your business’s cash flow and set the stage for long-term success.

More Than Profit: What You Need to Know About Cash Flow

A lot of business owners, especially those who are new to running their own business, mix up profit and cash flow. They are related, but they are two very different metrics, and it’s important to know the difference.

To find out how much money you made, you need to take your total revenue and subtract your total expenses. It’s a key measure of how well your business is doing over time, and it’s usually calculated every three months or once a year. You can be very profitable on paper but still not have enough money.

Cash flow, on the other hand, is the real movement of money in and out of your business. It shows the actual money you have on hand to run your business every day. When cash flow is positive, more money is coming in than going out. When cash flow is negative, the opposite is true.

The Parts of Cash Flow

You need to know the main parts of cash flow in order to manage it well:

• Cash Inflows: This is all the money that comes into your business. Payments from customers for goods or services, loan proceeds, investments from owners, and asset sales are all common sources.
• Cash Outflows: This is all the money that goes out of your business. Payments to suppliers, salaries for employees, rent, utility bills, loan payments, and marketing costs are some examples.

The main goal of cash flow management is to keep an eye on, analyse, and improve these inflows and outflows so that your business can stay in business and meet its short-term obligations.

Why Tracking on a Regular Basis is Necessary

It’s a bad idea to wait until the end of the quarter to check your cash flow. Tracking your finances on a regular basis, ideally once a week or even once a day, gives you a real-time picture of how well you’re doing. It lets you:

• Find possible problems before they get too bad.
• Be smart about how you spend and invest your money.
• Look for patterns in your income and spending.
• Get ready for big payments that are coming up.

If you keep a close eye on your cash flow, you can go from putting out financial fires to confidently running your business.

6 Ways to Make Your Business’s Cash Flow Better

Once you know how to keep track of your cash flow, you can start using ways to make it better. Here are six good ways to keep track of your business’s cash flow.

1. Get better deals from your suppliers

Your relationships with suppliers can help you manage your cash flow in a big way. It’s important to pay your bills on time to keep good relationships, but you can often get better payment terms.

You might want to ask for more time to pay your bills, like 60 or even 90 days instead of 30. This strategy, called extending your accounts payable period, keeps money in your business for longer, which gives you more options. Be a loyal partner when you negotiate with these people. If you have a history of placing regular orders and paying on time, a supplier may be more willing to help your business grow by meeting your request.

2. Give customers discounts for paying early.

You want your customers to pay you as soon as possible, just like you might ask your suppliers for longer payment terms. A proven method to accelerate your cash inflows is to offer a small discount for early payment. 

“2/10, net 30” is a common offer. If customers pay their bill within 10 days, they can get a 2% discount. If they don’t, they have to pay the full amount within 30 days. You lose a small amount of money, but getting cash sooner is often worth the cost of the discount. You can use this money to pay your own bills, buy inventory, or avoid getting short-term loans.

3. Use good inventory management.

For companies that sell things, inventory costs a lot of money. Having too much inventory ties up cash that could be used for other things, and it also costs money to store and runs the risk of becoming obsolete.

Use an inventory management system like just-in-time (JIT), which means you only order stock when you need it to fill customer orders. This keeps the least amount of cash tied up in things that don’t sell. Use inventory management software to track sales data and forecast demand accurately. This helps you figure out which items are selling well and which ones aren’t, so you can keep your stock levels just right and not order too many of things that aren’t selling.

4. Cut down on and keep track of overhead costs

Overhead costs are the costs of running your business that aren’t directly related to making a good or service. This includes things like rent, utilities, insurance, and administrative salaries. Some overhead is necessary, but if you don’t keep an eye on it, it can get out of hand.

Check your overhead costs on a regular basis to find places where you can save money.

• Could you rent a smaller office or a coworking space to save money?
• Are you paying for subscription services that you no longer use?
• Can you get your utility or insurance companies to give you better rates?

Over time, even small cuts in many areas can add up to big savings.

5. Make your invoicing process easier

A common cause of bad cash flow is an inefficient invoicing process. Invoices that are late, wrong, or hard to understand cause payments to be late. To make this process easier:

• Bill Right Away: Send invoices right away after the work is done or the product is delivered. The customer will pay you as soon as they get the bill.
• Be clear and specific: Ensure your invoices are easy to understand. Clearly say when the payment is due, how much it is, and how you can pay it. List the goods or services you offer to avoid any misunderstandings or arguments.
• Follow Up on Invoices That Are Past Due: Don’t just sit back and let collections happen. Set up a regular follow-up system. A few days before the due date, send a polite reminder. On the due date, send another one. If the payment is late, keep following up.

6. Look into financing options in a smart way

A business may need money from outside sources even if it has the best management. Planning for this kind of situation is a smart way to manage your money.

• Business Line of Credit: This lets you borrow money up to a certain limit whenever you need it. You only pay interest on the amount you use, making it a good option for managing short-term cash flow gaps. 
• Invoice factoring is when you sell your unpaid bills to a third-party company for less than what they are worth. You get a big part of the invoice value up front, which can be a big help if you need money right away.
• Short-Term Loans: You can use these to pay for certain planned costs, like buying new equipment or paying for a big project.

The most important thing is to use financing as a way to grow your business, not as a quick fix for cash flow problems that keep coming up.

Using technology to manage cash better

Modern technology gives you powerful tools that can make your cash management strategies work better and more automatically. Keeping track of everything by hand in spreadsheets takes a lot of time and is easy to make mistakes.

• Xero, QuickBooks, and FreshBooks are all accounting software that every small business needs. They make invoices, keep track of expenses, and make real-time financial reports, like cash flow statements.
• Automating Financial Processes: Use software to set up automatic payment reminders and invoices that come up on a regular basis. This makes sure that everything is the same and gives you more time to work on more important things.
• Real-Time Monitoring Tools: A lot of accounting software connects to your business bank accounts so you can see your cash position in real time. You can also use your historical data with dedicated cash flow forecasting tools to figure out how much money you will have in the future. This will help you plan more accurately.

Managing cash flow in the real world

The theory of cash flow management is strong, but seeing it work in real life is what really inspires.

Consider a small marketing agency that was consistently profitable but struggled with cash flow. Their clients usually paid in 60 or 90 days, but they had to pay their own bills every month, like salaries and software subscriptions. The agency was always short on cash.

They made a few important changes. They first offered a “10/10, net 60” payment term, which meant that if you paid within 10 days, you would get a 10% discount. A lot of clients took advantage of the big discount, which greatly increased the agency’s cash flow. Second, they changed some of their monthly software subscriptions to yearly plans, which usually come with a discount. This cut down on their monthly expenses. These simple cash flow plans helped them get their finances in order and gave them the money to hire a new designer to help them grow their business.

Another example is a small store that had too much stock. The owner looked at her sales data and saw that 80% of her sales were coming from 20% of her products. She had a clearance sale for the items that weren’t selling well to make some extra money, and then she only bought the items that were selling the best. This not only helped her cash flow, but it also made her more profitable overall because her money was now tied up in things that sold quickly.

Making your financial future strong

Managing your cash flow well isn’t something you can do once and forget about; it’s something you have to do all the time. You can build a business that is not only profitable but also financially strong by knowing the difference between profit and cash, keeping track of your inflows and outflows, and using smart strategies.

Pick one or two of the strategies in this guide to start using. You can add more as you see how it helps your cash flow. The goal is to make a system that helps you understand, manage, and feel good about your business’s financial future.

Business Kiwi can help you figure out how to manage your money better and look at your business’s finances in a professional way. Call us to set up a meeting and start learning how to control your cash flow.