Maintaining a healthy cash flow is business 101. The success of your company relies on your cash flow—a negative trend can spell trouble for your business. But what exactly is cash flow? And how exactly can you maintain a healthy cash flow in today’s complex, highly competitive business world? Today's guest post includes a primer on cash flow, specifically geared toward small business owners.
What is cash flow?
Cash flow is essentially the movement of cash in and out of a business. As you invoice for products or services, cash comes in. As you pay your expenses, cash goes out. A healthy business sees more cash coming into the business than flowing out of it.
Maintaining a healthy cash flow can be tricky work, but it’s essential for the ongoing success of your company. Here are just a few ways you can help your business maintain healthy cash flow through such tactics as being prompt with your invoicing, readjusting prices as needed, offering discounts for advance payments, and accepting electronic payments.
Set up properly and be prepared
The first step in any business is choosing the proper business structure. Different structures offer different tax benefits and legal protections, so take your time and choose carefully. When you’re considering your options, don’t be afraid to reach out to other business owners for their input.
Obviously, there are many risks associated with running a business and it’s important you’re prepared to face them. Serious challenges should be expected and prepared for accordingly. This practice is called “cash flow forecasting” and it will ensure you’re able to respond to any cash flow challenges that might crop up.
Monitor your inventory
If your business deals in inventory, this point is for you. You should analyze your inventory movement—determine what sells and what is moving sluggishly. The slow movers ought to be cut loose before they soak up even more working capital.
The aim here is to keep your inventory levels as lean as humanly possible. Consider automating your inventory management to help run your business more accurately and efficiently every step of the way.
Keep buffer money
Know your break-even point (BEP) and keep enough buffer money on hand to ensure your business can weather any potential storms. A good rule of thumb is to keep three month’s worth of outgoings in your accounts in case of emergencies.
Control cash outflows
Controlling cash outflow means staying on top of your expenses. This task can be made easier with cloud-based bookkeeping software. Closely monitor your outflows and don’t ignore cost-cutting opportunities when they arise. Early payment incentives might seem like a drop in the bucket, but every little bit helps.
Here’s another great tip that’s often overlooked: always ensure your cash balances are kept in interest-earning accounts. After all, this is free money. So don’t be afraid to cash in on it!
Doing your books yourself might seem like a good cost-cutting idea, but it can get tricky fast. Instead, you ought to hire a qualified CPA. A CPA will understand cash flow, tax law, and accounting practices. They’ll also be well versed in accounting software.
Cash flow over profit
If your cash flow is healthy, your profits will be too. The same can not be said when focusing on profit first. When it comes time to decide where to set your focus, always prioritize your cash flow.
A healthy cash flow is essential to the smooth running of a business. With these tips, you’ll be able to monitor and foster your cash flow, ensuring the continued success of your company—and those who depend on you.
Andrew M. Ayers provides an education-focused client experience designed to help you take control of your future. Whether you need an estate plan or require assistance with a legal issue for your business, he’ll take the time to explain your options in plain English and help you create your best path forward in a direction that works for you.
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