5 Cash Flow Management Rules for Small Businesses

5 Cash Flow Management Rules for Small Businesses

Cash flow is basically the movement of funds into and out of your business, and it should be tracked either each week, month, or quarter. Essentially, there are two kinds of cash flows. There’s positive cash flow, which occurs when the cash coming into your business is more than the amount of cash leaving your business, or negative cash flow, which is where the two are reversed. Generally, negative cash flow means trouble for a business, but there are some steps that you can take in order to improve the situation and generate more cash while either maintaining or cutting down costs.

Achieving a positive cash flow doesn’t just happen on its own; you need to work at it by analyzing and managing your cash flow in order to more effectively control the cash inflow and outflow. Here are some cash flow management tips for improving cash flow.

Separate Cash Flow and Growth

Many business owners view company growth as the best way to fix a cash flow issue. So, they often meet their goal of business growth and development, only to find that they have actually made cash flow problems worse in the process. It’s important to plan for any growth-related cash outlays in advance so that they don’t end up taking you by surprise.

Collecting Receivables

There are several steps that you can take to speed up the receipt and processing of receivables. For example, a lockbox that is serviced by your bank might be a good option if you have clients in further away locations since they can mail payments there where they will be processed by the banks more quickly. Ask your customers to preauthorize any checks that they send and centralize your banking at one bank. You could also try offering a discount to customers who pay invoices quickly.

Consider Short-Term Credit

Some businesses will need to borrow money in order to fix cash flow problems, particularly when starting out. A short-term loan, sometimes called a gap loan, can be useful to help you avoid running into further cash flow issues if you are experiencing a temporary reduction in business inflow. For example, if a client is late paying an invoice and you are relying on those funds coming in to cover a business expense.

Increase Sales

Going out to try and attract new customers or sell additional products or services might seem like a no-brainer if your business is in need of more cash, but this is often easier said than done. Acquiring new customers is often a very costly expense for a business, so it’s important to be careful that you don’t end up having the opposite of the desired effect and make your cash flow problems worse in the process. In fact, marketing to your current customers might be a much easier and cheaper method of bringing more cash into your business.

Invoice Incentives

If clients pay your business on receipt of an invoice, then you might be able to improve your cash flow by offering clients incentives to pay their invoice early. For example, many clients will be happy to pay an invoice early if it means that they get to enjoy a percentage off the total price, or a discount on their next purchase with you. Offering incentives that offer customers discounts or special offers in the future is another good option for improving cash flow as it increases the chance of clients returning to your service again. However, it’s important to be strategic with any discounts that you offer to ensure that early payments don’t leave you with a cash flow shortfall.

Cash flow is essential to the smooth running of a business; keep these tips in mind to improve your chances of achieving a positive cash flow quickly.

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