If you want to run a successful business, then effectively managing your cash flow is key. Your cash flow is the amount of money coming into and going out of your business. It includes both your business income, and your business expenditure.
Your cash flow is now the same as your profit however. Your profit refers to the amount of money left after you take all your expenditures away from your income. Your cash flow on the other hand, is the constant shift of money – into and out of your business. Find out how business insurance can help you protect your business.
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What Does Your Cash Flow Indicate?
You can have either positive or negative cash flow. When your cash flow is positive, this indicates that you’re making more income than expenditure. This shows that you’re making profit and are in the ‘green zone’.
Negative cash flow on the other hand, refers to more expenditure than income. If your business isn’t at least breaking even, then this could put financial stress on you. Without business income, you won’t have any working capital to conduct daily business operations with.
You won’t be able to pay your suppliers, your employees, or even your operational expenses. To avoid this, you need to carefully monitor your cash flow. This can be done in several ways. Here are five tips on how you can tighten your cash flow:
Depending on the kind of business you run, outsourcing can help you save money. If you find yourself having to hire new employees when you can’t afford it, outsourcing may be the solution. Say you want to hire someone to do social media marketing for your business. Hiring a new employee can be more expensive.
Even if you hire a part timer, you will still need to pay them consistently. This takes away funds from your working capital. Even if a hired employee has no work, you still have to pay them your agreed upon salary. Instead, if you outsource the work, you pay only for the project. You also don’t have to worry about hourly pays or adding a new employee to your payroll.
Many businesses outsource parts of their operations, such as customer service, IT services, HR and hiring, and more. You can even free up time from administrative tasks by getting a virtual assistant.
- Balance Your Accounts
A good cash flow is one that’s balanced between your accounts receivable and accounts payable. You’ll also need to take into account any potential shortfalls, that is, money you owe that affects your working capital.
Your accounts receivable is the money your customers pay you for your products or services. Your accounts payable is the money you owe to your supplies. Ways of managing this balance include encouraging faster payments, and also driving sales.
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- Ensure You’re Paid On Time
If your customers aren’t paying you in time, you in turn won’t have the capital you need to manage your business operations. In some industries, such as construction, where payment can come after project delivery, your finances could be tight.
Invoicing promptly can help you encourage faster payments. You can also invest in an invoicing software that automatically generates and sends invoices. Alongside prompt invoicing, consider providing incentives that encourage faster payments. This can come in the form of discounts for paying within a certain date, bonus services, and more.
You also shouldn’t forget about following up with customers who haven’t paid, setting up a debt collection strategy, and making payments safe and easy for your customers.
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- Stop Focusing on Profit
Business profit isn’t the primary indicator of success. Although you can make more profit some months, a healthy cash flow strategy would aim to consistently boost that profit.
Reinvesting your profits towards business expansion can help you make more profit in the future. When you focus only on the profit you make, and not on investing in business growth, you risk limiting your business. Instead, your cash flow management strategy should be oriented towards long term business growth.Conclusion
Your cash flow shows how money circulates in your business – how it comes in and how it goes out. Monitoring this consistently helps you ensure that you stay within budget. A good cash flow management strategy helps you financially protect your business.