Managing a small business comes with its share of challenges. From managing daily operations, invoicing, and accounting for profits and losses- running a small business is no small feat. To effectively ensure the longevity of your business, you should be able to handle the most crucial part of small business operations- the cash flow.
Types of Cash Flow
Positive Cash Flow
This type of cash flow is the one that you would ideally want to come in. Positive cash flow is when sales and accounts receivable exceed that of expenses incurred from business expenses and accounts receivables. Investopedia defines a positive cash flow as an increase in the company’s liquid assets that enable the company to cover expenses, pay stakeholders, reinvest in the business, and act as a buffer against financial difficulties.
Negative Cash Flow
A negative cash flow occurs when expenses such as business expenditures exceed that of income generated. Businesses will have periods of negative cash flow, especially when additional capital expenditures need to be made. This should only be a temporary period, and with the proper allocation of funds and resources, you should be able to turn the situation around.
Steps to Handle Small Business Cash Flow
Step 1: Regularly Monitor Your Cash Flow
To better understand where your business stands in terms of finances, you have to be vigilant in monitoring your cash flow. This vigilance can help you identify a negative cash flow early on and should give you an advantage in planning the necessary steps you need to take to correct it. By constantly monitoring your cash flow through regular accounting, you can determine whether your business expenditures generate enough ROI. Regularly update your books and hire a professional accountant to manage the accounting for your business.
Step 2: Have a Line of Credit Ready
In running a small business, there may be times that you need to make significant capital expenditures, and sometimes you don’t have the liquid assets on hand to cover them. These capital expenses are necessary investments that you need to help your business grow.
Seek approval for a line of credit early on when your finances are stable. This line of credit can become a ready source of funds if you need to make a significant investment or need some cash to help you tide through lean seasons. You may need an EIN verification if you need to take out a line of credit. There are online sites that can provide that service for you.
Step 3: Create a Separate Business Bank Account
Never mix your personal and business bank accounts. By doing so, you may find it challenging to monitor your cash flow effectively. Make sure that you have a separate bank account dedicated only for business transactions. Most banks will gladly help you set up a different business deposit account, especially if you are already an existing client. You can also ask your bank to issue you a separate business credit card that you can use exclusively for business expenses and transactions.
Step 4: Use Business Credit Cards
Once you have a separate business bank account, use a business credit card for big business purchases. It can be easier to track expenses when you use a credit card for your business transactions, so it is wiser to use a credit card instead of paying cash outright. By using your business credit card for these expenses, you can also earn points on your card that you can use for future capital expenses.
Step 5: Build an Emergency Cash Reserve
To keep your business afloat, you always have to be one step ahead. Anticipation is vital in ensuring the longevity of your business. By building a cash reserve, you provide a cushion for your company to fall back on during lean times. Start building your emergency cash fund early on. This fund should be on a separate account to know how many liquid assets you have at a glance. This cash reserve should be kept solely for financial emergencies and not for everyday business expenses.
Step 6: Take Account of Your Inventory
Your business can be suffering negative cash flow without you noticing it. To avoid this, make sure that you have an updated inventory of goods. Goods that are not sold will not generate any incoming and will end up being dead investments. Make sure that you mobilize any unsold inventory before ordering new ones. This helps increase your revenue, at the same time, cut losses incurred by obsolete inventory that you may have trouble disposing of in the future.
Step 7: Speed Up Invoicing
The faster you send invoices, the faster you will be paid. Make sure that your invoices are sent on time and that they are sent to the right person. Once a service or a product has been delivered, make sure that the invoice will follow. In addition to timely invoicing, you can also help buffer your cash flow by asking for deposits on large and long-term projects. By doing so, you are generating working capital that your business can use to complete the project.
Step 8: Cut Costs
To promote a positive cash flow, identify unnecessary expenses and make a move to cut them out entirely. Some business expenditures such as excess office supplies and food costs drain your financial resources that your company could have otherwise used for capital expenses. Take time to consider what your essential business expenses are, and stick to them. This cost-cutting process is critical, especially for start-ups who need the capital to drive the business forward.