Effective cash flow management is a vital part of running a small business. Up to 82% of small businesses fail within the first five years because of poor cash flow management or a lack of understanding of cash flow. Cash flow refers to the movement of money in and out of business and is essential for paying employees and expenses, investing in growth, and ultimately generating profit.
A cash flow shortage can quickly cause financial problems within the business and, in extreme cases, even bankruptcy. Here are our top tips for effectively managing cash flow in your small business.
What is Cash Flow, and Why It’s Important
Cash flow is money coming into the business from customers purchasing goods or services and going out of the business through business expenses such as employee salaries, paying suppliers, rent for business premises, monthly loan payments, and taxes. You can calculate your net cash flow by adding up all payments over a specific period and subtracting that figure from cash receipts. Cash flow management is essential in building a strong, sustainable business. Here are our five top tips for effectively managing small business cash flow.
1. Create A Cash Flow Forecast
Create a cash flow forecast that estimates all the cash you expect to come in and go out of the business for the next 12 months. This will enable you to identify any potential cash shortfalls in advance and take proactive steps to avoid them. It’s important to keep your cash flow forecast current, particularly as your business grows and its financial situation changes.
2. Regularly Monitor Your Cash Flow
Keeping a close eye on your cash flow is essential in ensuring your business stays on track and allows you to take appropriate action when necessary.
Create a schedule for regularly analyzing your cash flow statement and update it as and when new information becomes available. This will help you to keep on top of cash flow and make informed decisions for the business.
3. Get a Business Credit Card
A business credit card can help small businesses manage their cash flow more effectively in several ways.
● Tracking expenses: A business credit card from Capital on Tap Business Credit Card, issued by WeBank, enables small business owners to track expenses and employee spending, set spending limits, and will synchronize with your business’s accounting software.
● Deferring payments: Small business owners can use a business credit card to defer payment and provide more time to generate revenue to pay off expenses.
● Rewards and cashback: Some business credit cards offer rewards and cashback, which small businesses can use to offset expenses and improve cash flow.
● Build credit history: By using a business credit card responsibly, a small business can build its credit history, making it easier to secure affordable credit in the future.
● Secure credit in advance: Rather than waiting until you urgently need it, securing credit in advance with a business credit card will ensure you’re prepared for the unexpected.
“Opening an available line of credit via a business credit card before they actually need it can help small businesses smooth out cash flow fluctuations and avoid a short-term cash shortage. Having the cash available can also mean business owners can take advantage of business opportunities such as investing in new inventory or equipment that will benefit the business.”
Damian Brychcy, COO and US MD of Capital on Tap
4. Analyze Your Invoicing Process
Forgetting to send out invoices, not chasing up unpaid invoices, and having lengthy payment terms are some common invoicing mistakes small businesses make that can adversely affect cash flow. Analyzing and improving the invoicing process is an effective way to enhance cash flow. Ensure your invoices are clear, accurate, and sent promptly. Consider introducing incentives, such as discounts or other promotions, for customers to pay their invoices early.
5. Use Cash Flow Management Tools
There are several cash flow tools and apps that can help you manage your small business cash flow more effectively.
QuickBooks, Fathom, Invoiced, Wave, FreshBooks, Float, and Xero, are popular cash flow management tools with expense tracking, payment processing, invoicing, reporting, and cash flow forecasting features. These tools can help small businesses make more informed financial decisions and ensure financial stability.
For instance, for businesses that use Square as their payment processing tool, it’s crucial to consider the need for calculating associated fees to ensure effective cash flow management, which contributes to making more informed financial decisions and maintaining financial stability. To aid in this process, businesses can rely on helpful tools like the Square transaction fee calculator, which allows them to accurately assess the impact of transaction fees on their overall cash flow.
“By tracking cash inflows and outflows, small business owners can identify areas where they can cut costs, make better purchasing decisions and ensure they have sufficient cash available to meet their financial obligations. Depending on which cash flow management tool they use, businesses can also use the technology to plan for the future, spot potential shortfalls in their cash flow, and take proactive steps to fill any gaps.”
Damian Brychcy, COO and US MD of Capital on Tap
Small Business Cash Flow: Summary
Managing cash flow can be challenging for small businesses, but it’s essential for a thriving company. Following these tips can help you effectively manage your small business’s cash flow and ensure its financial stability now and in the future.
