Cash flow is the lifeblood of a business. It’s what keeps the lights on and the doors open. And lack of it is one of the biggest reasons businesses fail. In fact, 82% of small businesses fold due to cash flow mismanagement.
If you’re spending more on bills, payroll, inventory and interest than your company is bringing in, you have negative cash flow — a key indicator that your business’s financial health is suffering. In that case, it’s time to make some serious changes, as the future of your business depends on it.
Having just enough won’t cut it
Not only do you need adequate funds for day-to-day business expenses, but you need enough cash to pay suppliers, creditors and your employees before you actually generate a profit. Understanding how cash flows in and out of your business gives you the power to plan strategically for the future, improve vendor relationships and increase the likelihood that you never run out of cash.
The sooner you learn how to manage your cash flow, the better your chances of success. Here are some tried and true strategies for improvement:
- Control inventory. Holding too much inventory ties up cash, but not having enough can lead to a loss in sales and unhappy customers. Through consistent analysis, you can ensure that you’re on top of your needs.
- Collect receivables. Establish a formal collections schedule and follow up on non-payers. Consider charging interest to penalize late payers or end unprofitable relationships entirely.
- Control access to bank accounts. Keep the number of people who can access your accounts to a minimum, and be sure to update passwords as needed.
- Outsource when it’s cost-effective. For certain areas of your business — like accounting, marketing, payroll and HR — it might make more financial sense to subcontract to a firm that specializes in those functions.
- Consider leasing vs. buying — or vice versa. If you’ve been leasing, your costs are likely predictable. But purchasing equipment can substantially alter your cash flow. Reevaluate your costs and your needs to see what works best.
- Run monthly cash flow reports. Whether you use Excel (not recommended!) or software such as enterprise cloud versions depending on your needs (Great Plains, NetSuite or Intaact), take time for a weekly overview of cash received and cash paid out to show your business’s cash position.
Understanding the financial environment of your business
According to Inc., “If you haven’t considered cash management an important issue, then you’re probably undermining your business’s short-term stability and its long-term survival.”
There are few things more important to your business than cash flow — especially if you’re striving for growth. That’s why Magone & Company offers business advisory services that look ahead in real time rather than relying on typical rear-facing accounting services.
Reach out to see how we can help get your cash flow on track for the long term.