By Aline Chaprazian
Cash flow is essential to the financial management of small businesses. Many small business owners tend to focus on the net income of their company as opposed to the cash flow. Let’s be clear; net income is important, but business owners should also spend their time focusing on cash flow management as well. Why? Well, balance is always important, and when a company grows, you need a way to pay for things right?
Cash flow is that foundation. It’s what enables you to keep up with increasing expenses, payroll costs, and other investments.
It’s critical for every business owner to take the steps to create a positive cash flow management system. How? There’s a lot to factor in when determining an effective cash flow program and here are some helpful tips to get you started:
- Plan for the Future (Long Term Needs)
Step one is simple, project your future needs. Your business can be volatile at times, and as a business owner, you need to fully prepare for what lies ahead. The profit the company will be making may be fantastic, but don’t forget to factor in financial circumstances that could leave you without cash flow. You have to consider your customer’s payment patterns, future spending needs, and a potential market slowdown, to name a few. Having an accurate cash flow estimate can keep you and your company ahead of the game and prepared in case of any capital deficiency.
- Manage Inflow
There needs to be a set strategy to manage your business’s cash inflow. It’s important for every business owner to have a system in place to monitor your company’s accounts receivable balances and collections. It’s always helpful to send out reminders to your customers and understand their historical payment trends. Make sure this becomes routine and that your company is on top of collections.
Also, avoid overextending credit. Establish set terms for your eligible customers and make sure your company is adhering to them. It’s all about staying ahead of the game and making sure the company stands its ground on the established terms based on customer risk factors.
- Manage Disbursements
Make sure you are managing your payment terms. Businesses have other weekly expenses which include payroll, materials, and supplies as well as the others costs of running a business which includes: rent, debt service, overhead, etc. If you pay a vendor ahead of schedule without collecting on your sales first, it can lead to negative cash flow. Try to negotiate vendor terms that are consistent with your customers’ terms and attempt to avoid making payments ahead of those terms.
- Understand Sources of Available Financing
Most small business owners fund their company. As the business grows, capital requirements typically increase. When the working capital requirements of a business exceed the amount an owner has available to invest in his/her business or exceeds a reasonable level of investment, the business owner should seek additional outside financing.
That financing can come in the form of traditional lending sources such as banks, active partners and silent investors, or several other forms of nontraditional financing.