The Advantages of Cash Flow — Small Business Tips
Cash flow management is essential whether your business is just getting started or has been around for years. It can leave you struggling with paying bills, vendors and even your employees.
The good news is that there are plenty of ways to get your finances in order. One way is to review your everyday expenses.
It Helps You Make Better Decisions
Cash flow is a key part of evaluating and managing your business. It shows you how much money is coming in and out of your company, including sales, loan proceeds and interest income, and expenses for inventory purchases, payroll, rent or utilities, taxes and other business costs.
A positive cash flow boosts your buying power, giving you access to bulk discounts or early settlement discounts on supplies and services. It also improves your liquidity, allowing you to invest and grow your company without worrying about cash shortfalls.
As a small business owner, you’ll likely have to juggle several payments: invoices from suppliers, your landlord and credit card companies. When you receive a large payment, it’s tempting to pay everyone off immediately — but this can drain your cash position, leaving you unable to buy inventory, fund growth and pay employees and suppliers in the future.
It Helps You Manage Risk
Cash flow management is important in running a successful small business, but the process can be confusing. Fortunately, the SBA has some tips to help you navigate the pitfalls. First, be sure to understand what cash flow means to your business. This will give you a better idea of the big picture and how to make it work for your company.
Using the right tools to track your cash flow is also key. Many businesses rely on spreadsheets or bookkeeping software to help them stay on top of their accounts receivable and payables. However, some great free online tools will provide you with a comprehensive cash flow overview and visualization.
One of the best ways to get a handle on the big picture is to establish a break-even point — or the point at which you have earned enough sales to cover your expenses and make a profit. While this might seem like a dry subject, it can help you determine where to cut costs and when to invest in new growth strategies.
It Helps You Make Investments
A business’s cash flow is critical to its growth. It determines whether you can purchase fixed assets or materials, hire new employees, and expand your business to meet new sales and demand.
Small businesses often need help to generate and hold onto the cash they need to operate continuously for prolonged periods. This is especially true of those that sell seasonal products or services.
As a result, many small business owners find themselves caught out when they encounter an unexpected opportunity that requires significant up-front cash to take advantage of.
To help you understand your cash position, a good accounting system should track key business metrics like accounts receivables aging and operating margins. This will give you the insight you need to plan for future cash flow needs, so you can take advantage of opportunities that come your way.
It Helps You Plan for Growth
Cash flow is a crucial part of any business plan. With it, your company may survive the next fiscal quarter. In addition, a healthy balance sheet can help you avoid the costly mistakes most small business owners make, like overextending credit lines and skimping on essentials such as payroll. It is also a great way to gauge your business’s growth potential and ensure you invest in areas that will yield high returns.
A good cash flow forecast will keep your sanity and help you focus on the things that matter, such as customer service and growing your sales. It is also the best way to tell whether your customers are lining up for a repeat order or just passing you by. Keeping tabs on your business’s finances will also allow you to spot a red flag if you are about to go under before it happens. The benefits of a good cash flow are well worth the effort.