Times have changed dramatically and in modern times you can easily set up a business and operate on a large scale. Almost every field offers many opportunities for entrepreneurs. However, starting and running an effective business may not be as easy as we may initially feel. Technology as we all know is helping businesses across the globe operate efficiently and grow, but there is another obstacle, which is Cash Flow!
The realities of cash flow are complex topics when it comes to business management. Cash flow management falls under the understanding of finance and includes how business owners handle cash issues. Financial literacy is crucial in business management as it affects business performance, growth, sustainability and expansion.
In reality, statistics shows that 82% of small businesses fail due to poor cash management. Improper handling of cash can lead to business failure and it is certainly an aspect that many businesses struggle with. If you are a business owner or have recently started a business, we wanted to explore some tips that can help you manage and improve your business cash flow. Let’s dive into this by starting with the definition of cash flow!
What is cash flow?
Cash flow generally refers to how money goes in and out of a business. In other words, the movement of cash in a business refers to cash flow. Good cash flow helps businesses maintain operations, meet operating costs, and scale. However, poor cash flow, often resulting from a lack of financial literacy, affects business operations and growth.
Good cash flow indicates that a business is growing and it can sustain itself. It enables business managers to operate efficiently and reduces investor exposure and dependence. Running a business comes with a host of complications like paying employees, day-to-day operating costs, and risks.
In addition, you can have different development plans, such as AI implementation or implement newer technologies like AR or VR, or you may want your business to join the metaverse. With great ideas like these, poor cash flow can limit opportunities for business growth. What can you do with it?
5 useful tips to improve business cash flow
Whether you’re running a small business or a large one, some of these cash management tips will help you improve your business’ finances;
Encourage customers to pay on time
It is good to extend commercial credit facilities to customers, but it is essential to assess the business viability first. Offering merchandise in the form of credits, discounts, and other incentives can boost a business’ sales, but if it’s poorly managed, the business can pay a heavy price. If your business offers this to customers, they should be encouraged to return their money on time.
Encouraging customers to pay on time helps businesses operate efficiently. An organization will not have to apply for loans to meet day-to-day expenses or plan growth. Apply payment deadlines, require initial deposits, and introduce actual penalties where necessary to motivate customers to comply with payment terms.
Plus, track cash in and out to understand monthly or weekly expenses. This will help with financial planning, improvement and management.
Invest in affordable marketing techniques
Marketing activities promote a business’ goods and services and allow the business to expand its reach. Effective marketing strategy It also helps businesses gain a competitive advantage in the market. However, marketing is quite expensive, especially when running multiple campaigns.
On top of that, marketing can cost business owners dearly if done wrong. With that, it is essential to evaluate marketing strategies to ensure that they are affordable and aligned with business goals.
In the case of startups or small businesses, avoid investing in costly marketing strategies. Effective leverage copywriting tips and low-cost marketing strategies like videos, blogs, and email marketing can help businesses promote their services on a low budget. On top of that, you can invest in social media marketing.
Social media marketing is an effective way to promote your products, develop customer relationships, and expand your business. Use social platforms like Instagram, Facebook, and LinkedIn among others to market your business and its services. This way, you will better manage and improve your financial cash flow.
Avoid unnecessary spending
Business administration costs cannot be taken out of the equation, but business owners often have the upper hand in it. Often times, you may want to offer employee perks, rent an attractive office space, or host the company’s annual party, but it’s important to check their ability to pay.
Start by assessing staffing activities and costs. In this case, avoid hiring without a proper plan. Over- or under-employment plus unchecked day-to-day staffing costs are a major cause of unnecessary spending. Also, avoid high-priced office spaces as they only increase the cost of doing business in the long run. Primarily, evaluate and then approve claims before spending.
Cash flow model review
Tracking cash inflows and outflows weekly, monthly, and yearly can provide insights into business spending. The best way to ensure effective cash flow management is to prepare a cash flow statement. A cash flow statement is a financial document that allows businesses to manage and improve their finances.
It usually represents the amount of cash available relative to the cash going in and out of the business. Creating other financial statements such as balance sheets, tax returns, and income statements can help business owners evaluate and improve cash flow. Collectively, they help business owners understand money movement patterns to eliminate unnecessary spending and redeem loans. It also paves the way for effective financial planning.
A budget is a great financial management tool and that’s why budgeting is important for business owners. Budgeting is primarily a process of estimating the possible costs and revenues of a business. Operating on a budget serves as a compass for all financial transactions of a business.
Create a budget and leverage Financial KPIs to evaluate your monetary transactions, revenue and overall financial performance. Budgeting can also help eliminate unnecessary spending patterns that affect a business’ financial well-being. This way, you will be able to effectively improve your cash flow.
It is quite difficult for business owners to manage their cash flow effectively because of the many uncertainties that can be encountered in day-to-day operations. However, Financial Statements are like cash flow statements that can help any business owner understand and track the cash flow in and out of the business. When used correctly, cash flow statements can help identify unreliable financial models that affect a business’s financial position.
This blog details a few ways business owners can improve their financial situation. When strictly followed, they can help increase business profitability, smooth operations, and lay the foundation for business growth.