Running a business is anything but a piece of cake. It involves taking risks, extensive planning, and careful management of resources, and not many are equipped with the entrepreneurship skills required to handle these tasks.
Thus, around 20% of small businesses fold in the first year, according to an article by the Telegraph, and nearly 60% close down within the first three years. According to a report on Investopedia, the lack of adequate funding or capital resources falls among the top reasons businesses fail.
While financial hurdles are an unavoidable part of setting up and running a business, they do not have to be the reason why your business fails. All it takes is a little bit of planning and efficient resource management to succeed.
Here, we bring you top cash flow management tips for small businesses to help you set up a functional and efficient resource management system. But before we dive into our tips and suggestions, let us first understand what cash flow actually is and why it is important.
What is Cash Flow Management?
Cash flow management refers to the practices and strategies businesses undertake to monitor and track the amount of money coming in and going out of a business. It involves tracking earnings and expenses and calculating the net cash flow to determine whether the company is making a profit or a loss.
The ultimate goal of all cash flow management strategies is to earn a positive cash flow so that the business starts earning a profit. Here are a few tips that can help you achieve that goal.
1. Calculate When You Will Breakeven
Efficient cash flow management is all about planning, and the first step to efficient planning is to calculate when you will break even. It will help you get an idea of when you will start earning a positive cash flow, which, in turn, will help you plan your finances smartly until the business becomes profitable.
2. Keep Your Eye on the Cash Flow and Not on Profits Alone
Sure, earning a profit or breaking even can be the major benchmarks or management goals, but they shouldn’t be your primary focus. Another common mistake that many entrepreneurs end up making is trying to cut back on costs too heavily to attain profitability a little quicker.
Understand that as a new entrepreneur, you will have to spend a substantial amount of money on setting up your business. Your focus should be on ensuring you avoid any unnecessary expenses such as paying really high electricity bills or purchasing more inventory than you can handle.
Spend only on essentials in the short run, and you can, of course, focus on expanding operations once you start earning positive cash flow.
3. Set Up Emergency Cash Reserves
The initial days are going to be a struggle, and you may find yourself out of cash on some days; on others, you will barely manage to cover your day-to-day expenses. But on some, you may even be able to earn a little extra. On good days, you will have to act smart and save what you earn to use it on the bad days. You will also need to set up emergency cash reserves in case you have a few consecutive bad days.
4. Collect Receivables As Soon As Possible
We understand that giving customers to purchase products and avail services on credits may be a good marketing move. But refrain from offering such incentives during your starting days. Instead, try to encourage early payments by offering discounts on upfront cash payments.
As a start-up, you need to keep a close eye on your earnings and your expenses so you can set financial benchmarks and set goals. Try to encourage your customers to pay ahead of or on time, so you don’t find yourself waiting for payments to calculate net profitability.
5. Set Invoice Timelines
In continuation with our previous tip, you should also set up invoice timelines or clear payment terms when taking up new clients. You need to be able to put a date on when you will receive your next payment, so you can plan your expenses accordingly. Thus, all your clients should be very clear on payment terms and conditions.
6. Hire a Professional Accountant
Managing a business, overseeing business operations and managing the company accounts by yourself is not an easy task. In fact, you may end up tiring yourself out to the point where you start mismanaging important tasks. Thus, you need to delegate important responsibilities such as accounts handling to professionals well-equipped to handle the job.
Accounto is a cloud-based accountancy firm based in Dublin, Ireland, offering professional accounting services at affordable set rates to new businesses. Reach out to us if you would like to establish a functional financial and cash flow management system for your business.