As Indians, we all know about those thick-bound ledger books used to maintain business accounts in the old days before computers and digital transactions replaced them. Just as they were a vital part of business growth back then, managing accounts still remains a key element of business development and stability even today. As a small business owner or entrepreneur, it is crucial for businesses to monitor their cash flow on a regular basis.An imbalance of cash flow can cause businesses to go bankrupt even if they are making profits on paper. This handy guide will explain how to manage cash flow in a small business successfully.
The easiest way to get to positive cash flow is to receive cash at the earliest. Invoice your customers immediately after the service or product has been delivered. Design your invoices so they’re straightforward and easy to read, with key areas like due date, the amount due, where to send payment and payment methods highlighted. Speed things up further by emailing invoices instead of mailing them. Follow up with clients with long-overdue accounts to recover the amount due. You can also provide discounts for early payments. Use an invoicing system to auto-generate invoices and give customers multiple options of payments to ease up the transaction.
Any business has multiple payments to be made like rent, salaries, vendors, and other business expenses and requires managing cash flow. Unless there is an incentive to pay your dues early, choose to pay your vendors as late as possible without risking late fees or harming the relationship. This will make sure you have cash available in your accounts for other urgent payments until more cash comes in. You can also negotiate terms with vendors to include a delayed payment structure for larger order quantities or discounts for early payments. This will overall reduce your negative cash flow.
Excess inventory can tie up cash and also result in increased costs due to storage expenses. With customer requirements constantly changing, one can choose to either sell or dispose of excess inventory to reduce costs. Similarly, if your business has any equipment that is idle or obsolete, selling it could generate quick cash. Equipment that has been owned for a longer period will usually have a book value equal to its salvage value or less, so a sale might result in a taxable gain. If you have to sell below the book value, however, you will incur a tax loss, which can be used to offset other profits of the company.
Many businesses opt for short term financing like a line of credit from the bank for an emergency purchase or to bridge the gap between payables and receivables. You can also opt for business credit cards to make payments to vendors and also use the reward system for points to be redeemed for business travel or business purchases.
To make managing cash flow and working capital easier choose to finance purchases of large assets like equipment and real estate using long term loans instead of using your working capital. This allows you to spread the payments over the average life of the assets. While there is an additional expenditure of interest, you’ll have preserved your working capital for business operations. Alternatively, you could choose to lease vehicles, computers, and other business equipment that avoids tying up cash and yet allows you to expense them as costs on your business taxes.
Analyze your inventory movement to determine which items are fast-moving and which ones are not can help in managing cash flow. Try to keep lean inventory levels so that your cash isn’t tied-up unproductively and unprofitably. For example, if you suddenly receive high demand for a product, it’s tempting to order a high volume of material to service that demand.
When the business starts to make profits, we tend to ignore cost-cutting opportunities and may also go on a spending spree for business requirements. Unmanaged negative cash flow is a silent killer for business. Always be on top of your expenses and figure out methods to reduce or eliminate costs. Companies that operate in a lean fashion are better able to withstand economic shocks.