How to Manage Cash Flow in Small Businesses

Abhishek Kumar Singh
Abhishek Kumar Singh Oct 01 2021 - 4 min read
How to Manage Cash Flow in Small Businesses
This article will examine common causes of cash flow difficulties so you can be better prepared to prevent them from happening in your own business.

Cash is the life force and most fragile element of any business. If you are a small business or are planning to be one, cash flow is critically important. A small shift in cash flow can amalgamate the difference between survival and bankruptcy. Cash flow management is difficult for big brands and oddly challenging for small businesses. If you are running a small business or thinking about starting one, you should consider reading this article on how to manage cash flow. This article will examine common causes of cash flow difficulties so you can be better prepared to prevent them from happening in your own business.

Manage Income and Expenses

Every small business needs cash flow management. Even a successful one needs to keep an eye on where the money is coming and going. It's not possible to run a small business without knowing these two things.  Although you may not think so, making money is very much like growing vegetables: you have to keep an eye on where the money is coming from and going and make sure it is all going where you want. Once you've got the money coming in, the next step is figuring out where it's going. That may seem obvious, but it isn't always. Many people think that if their business makes money, they will be able to use it however they want. But there are only two uses for the amount of money your business makes: putting it back into your business or putting it into someone else's pocket.

Don’t Lose the Money

The two most important things in business are to make money and keep it. The trick is not to lose it. You don't need a lot of fancy accounting info to keep your money. Look at the balance sheet. If it is in the red, means you are losing money. The balance sheet will have two important things as assets—things that you own, like cars or buildings or furniture—and liabilities, which are things you owe, like loans or credit card bills.

And here's the problem: the assets commonly sunk to their lowest making you lose the money. If you try to sell them, they give pennies on the dollar for them. The same goes for the liabilities, which are often still high because they are tied up in things that aren't worth much today but may have value later on.  To manage cash flow, you should understand how to manage assets and liabilities to get profits back into your pocket.

Try Getting Paid On Time

The most important thing you can do to protect your cash flow in a small business is to have your customers pay on time. Before getting on how to do this, let’s take a look at why customers do not pay on time.  The most common reason is that they forget. To solve this, you can try reminding them in a professional and requesting manner.

Another common reason is that the customer thinks it is ok not to pay you for a while. They sometimes think it is easy for you to get your money from someone else, so they don't mind if they get away without paying for a few months. You can write them a mail or send a post(with the invoice if needed) to let them understand how important that money is for you.

A third common reason is that they think it will be easier for them to pay later than now. In this situation try holding the amount for a while. Excessive eagerness toward money can also break your relations with the customer. 

Calculative Risks

First of all, you need to know that cash flow is not the same thing as profit. Cash flow is what get and payback, while profit is what's left over after everything else. If you get a big cheque from a customer but have to pay two employees the same day, your cash flow might be negative even if your profit for the month is positive.

Managing cash flow can be easy if you take a calculative risk when needed. You should purchase just enough inventory items to meet immediate needs. Purchase only from reliable sources. If you have been doing business with a supplier for a long time with no problems, then you can usually buy from them without negotiating a contract every time you place an order. Inventory sits there costing money makes you wait for someone to buy it. Investment generates no money while it sits there waiting for its return to come in.

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