In order for any small business to grow and become successful, the business cash flow needs to be handled in the right way. Unfortunately many small businesses have failed due to the lack of managing their cash flow which has led to unforeseen costs, taxes, and overspending.
In this guide you’ll learn what small business cash flow is, why it is so important and how to manage it. We will also look at some of the main cash flow issues and how to avoid this to grow your small business.
What is cash flow?
Cash flow is defined as the money that goes in and out of a business. In order words, the cash which flows through the business. In more general terms, this refers to the money that goes into your business from investors, grants, and clients, and that flows through into salaries, rent, taxes, production costs, etc.
Why is cash flow management so important in a small business?
Cash flow is an important aspect for any business, but more so for small businesses and start ups. When starting a business, a lot of money is initially invested within the business. Some invest their savings to create and keep themselves and their business running for at least the first year. However, the majority of business owners find the financial support elsewhere. This could be in the form of a loan from a bank, using a credit card, having one or more business partners, getting investors, borrowing money from loved ones, etc.
Either way, all of parties that contributed towards financing your business will eventually need to be paid back. Now, the time that you have to pay them back will depend on the agreement that you reached together, and naturally, that varies from business to business and from person to person. One thing that is common among all business owners is that the money that you need to pay them back has to come from the business itself. Therefore, being able to manage your cash flow is extremely important so that you’ll have enough profit to pay your investors back.
What makes cash flow management challenging?
Unfortunately, what many of us tend to forget is that the money that you owe back to your investors is only part of what your total expenses will come to. When running a business, you’ll also have to consider additional costs such as your rent, your business taxes, your employees wages, and your own living costs.
Now, most business loans are not paid back in the first year, and many businesses struggle to make a big profit in the first year. That’s why cash flow management needs to start as early as possible.
It is important to remember that even with the financial support from investors, and the time that you may have to pay it back, you must always keep an eye on all of your expenses. It can be easy to see a full bank account and think that you have plenty of time and therefore spend far more than you can actually afford.
In order for cash flow management to function properly, you’ll need to make sure that more money is coming into the business than going out.
The problem with mishandling the business cash flow is that it can have a snowball effect. It could start with not paying your bills on time, your employees, or your taxes, and could end up meaning needing to borrow more money to pay back the outstanding loans that you already have.
So, how can you keep your cash flow under control?
How to manage your cash flow
1. Start saving
The best thing that you can do to help with your cash flow is to start saving where you can. Aside from saving on specific expenses, this also means putting money to the side for a rainy day.
Saving a bit of money every month will help you in the long run. Even if your business is thriving and only continues to grow, every business falls on hard times at one point or another, and having a bit of extra money could help carry you and your business through the hard times.
Of course, these savings should come out of the profit that you make. They should by no means be taken out of money that you owe, salaries, taxes, etc. But, after all of the expenses, if you do have some money that you can put to one side, you should! Do not get frivolous with your money just yet, as your business may rely on it one day.
2. Make a business plan
It’s good to plan ahead. Within your business plan, you should detail what you want to do with your business, where you hope for it to go, what specific products, tools, machines, materials, and so on you may need to start the enterprise, how much money you need to start and how much money you need monthly to keep the business running, and where exactly you think you can get the start-up costs from (bank, investors, family members, etc.).
Thanks to your business plan, you will be able to decide, to the best of your abilities, how much exactly you will need on a monthly basis to keep the business running. It’s also a good idea in the business plan to include other expenses, such as taxes, so that you do not come across any nasty surprises during your first year.
Having a business plan also looks a lot better when going for a bank loan or applying to investors or for grants, as it shows a certain professionalism and seriousness that they will be looking for.
3. Make a monthly cash flow statement
Although it can be time-consuming, it is essential to start as soon as possible to make a monthly cash flow statement. This will help you gain insight on how much money is coming into the business and how much is going out. It will also help you to keep track of your expenses and help you to analyse whether all of your costs are completely necessary and how to cut down. In your expenses, you should include everything that comes out of the business, such as production costs, taxes, salaries, rent, etc.
4. Make a monthly budget
Once you have seen your monthly cash flow statement, you will be able to create a budget for the next month. Budgeting will stop you from spending too much on things that you may not need and will help you to plan ahead for significant expenses that may be coming out during the next month.
What factors lead to cash flow issues in a small business?
There are a number of things that can lead to having cash flow issues. Many of the more basic causes are not having enough clients or having too many expenses. This could also be the prices for your services or products being too low, high tax bills, etc.
Many businesses go through seasonal issues, too. If your business revolves around a particular holiday or a season, then you will naturally get more money around the peak time for your business. For example, a Christmas card company is not likely to make the biggest profit in June.
Sometimes, these kinds of cash flow problems will lead to a business building up a loss and could lead to debt.
Some of the other issues are out of a business’ control, too. For example, tax rates change frequently, and some of them change to a degree where it becomes very difficult for a business to stay active.
However, some other recurring cash flow problems can be dealt with, with a bit of anticipation, planning, and care.
How to improve cash flow in a small business
Whether you have incurred losses or debts from unforeseen cash flow problems, or are just keen on increasing your cash flow value, then these easy tips and tricks should help you along the way:
Look at your current advertising strategy
The best way to bring in more money is to bring in more clients. Make sure that you are using the best mediums today for advertising, such as SEO, social media, a good website, etc.
Review your expenses
Using your monthly cash flow statement, take the time to review your expenses and try to cut down where you can. Taking care of yourself and your employees should always be your top priority, but wherever costs can be cut down, do it!
Prepare for the worst
As previously mentioned, having a savings account where you keep any extra profits that you might make, no matter how small, can be extremely useful. In business, you should know that expenses change all the time, and you need to be willing and prepared to handle whatever hurdle might come your way to stay in business.
Hire an accountant
If you are in a position where you are able to, hiring an accountant is an excellent idea for any business. They will be able to go over your business expenses with you, review your income and cash flow, and help you with your taxes, as you may be able to get some tax returns to help with the business.