For a lot of small and medium-sized business owners, the financial planning aspect of running a business is often the most difficult part. Many are skilled entrepreneurs and experts in their field, but those areas of expertise often do not include the more obscure points of business finance. According to the U.S. Small Business Administration, the majority of businesses close due to low sales and poor cash flow.
One of the most important financial strategies for any business is the proper management of cash flow. This is different from your net profits, as it describes the amount of liquid assets – cash – that you have on hand at any one time. This is the money that you get when customers make payments and the money that you use to pay your expenses. Managing it correctly can be the difference between going under and successful growth.
If you’re not using them already, try implementing these cash flow optimization strategies in your business. You’ll quickly start to see the difference it makes in your business.
1. Plan Ahead
A big part of successful cash flow strategies is good forward planning. This includes outlining projected costs – like your day to day overhead, purchasing new equipment, or expanding your staff – and creating plans for how you will meet those costs.
This strategy will also help you identify times where your liquid assets might not be enough and allow you time to make preparations, such as cutting costs or applying for a business loan.
2. Check Your Cash Flow at Regular Intervals
Doing regular checks goes hand in hand with advanced planning. Make it a habit to sit down and evaluate your liquid assets at regular intervals. See how it stacks up against anticipated upcoming expenses.
You should do this for both the short term and the long term. Do monthly checks to make sure you have the cash to sustain day to day costs. Quarterly, even yearly checks and projections will help you make sure your business is growing as it should.
3. Payment Term Optimization
One of the best cash flow optimization strategies for your business is to make sure your payment plans align. If your payments to creditors or suppliers are due in 30 days, but your client’s payments to you aren’t due for 60 days, then you’ve set yourself up to run out of money.
Make sure client payments are correctly scheduled and give them incentives for making early payments. Establish a protocol for quick and effective responses to overdue accounts.
4. Streamline Customer Payments
It might seem obvious that the easier you make it for your customers to pay you, the more likely they are to do so on time or even ahead of schedule. But this is a step that a lot of small businesses tend to overlook.
Give customers a variety of ways to make payments. This could be over the phone, online, in person, and via app. It is also important to make sure that each payment option works well and is easy to navigate.
5. Diversify Your Client Base
Of all the cash flow strategies you have at your disposal, diversifying your client base is one of the most critical. Having a wide and diverse consumer base means increasing your sources of revenue, which will, in turn, increase the volume and consistency of your cash flow.
Increasing your client base also provides more stability for your business. In case you were to lose one demographic, you will have others to fall back on. It also provides new avenues for your business to grow.
6. Identify Your Largest Expenses
It’s important to track where all your money goes. By keeping up with your business’s bookkeeping, you might be surprised to see where the majority of it is going. Whatever your largest expenses are, try finding ways to reduce those costs, such as finding alternative suppliers or negotiating more favorable trade terms.
7. Watch Your Operational Costs
Keep a close eye on your day to day costs of operation. This means everything from building utility bills to expenses for office supplies. Look for ways to reduce these costs without negatively impacting your service to your customers or the work environment for your employees. If applicable to your business, teleworking is a great way to cut back on operational costs.
In the same vein, it is good practice to keep personnel costs low, especially when you first open. It’s more economical to start out with a few staff working more hours than many staff only getting a few hours each. You can always hire more later as you grow.
The Bottom Line – A Diligent Overview is Key
Strengthen your grip and sharpen your gaze on your business’s cash flow.
This is essential to scale and following these tactics at every stage of your growth will lessen the chance of financial failure.
While a constant eye for detail in your company finance portfolio may seem excessive, it’s these responsible practices that will keep your cash flow managed and pave the way for your business’s long-term success.