Introduction

As a small business owner, you’re aware that good cash flow is necessary for both your short- and long-term health. However, ensuring a consistent flow of cash is no easy task, especially if you’re just starting. In this blog post, we’ll outline some crucial tips that will help you generate positive cash flow in your small business.

Additionally, you’ll learn some proven methods for increasing your cash flow. These strategies are particularly effective if you want to start fast without investing much money in the beginning. You need to be realistic about how quickly your business will grow, and that is where these tips come into play, giving you a longer-term, sustainable advantage over potential competitors.

By following these simple guidelines, you’ll be on your way to sustaining a healthy cash flow while growing your business at the same time!

At the end of this article, you should be able to answer the following questions:

• What’s the best way to guarantee good cash flow in your small business?

• Is there any risk associated with guaranteeing good cash flows in your small business?

• What are some of the biggest mistakes that people make when it comes to managing their cash flow?

• What strategies can small businesses use to manage cash flow effectively?

• How can a small business improve its cash flow?

• What are the strategies to reduce cash flow problems?

An overview of the problem

It is fantastic that you were able to get your business off the ground. Every day, you’re bringing your brilliant concepts to life and watching them grow. Yet, you must ensure your startup is viable by utilizing a well-oiled process that keeps money flowing. Many startups willfully or mistakenly disregard the lifeblood of any business, which is a properly developed financial and accounting system that supports consistent cash flow.

While others have large sums of startup cash, most small businesses get off to a slow or no-money start. Cash reserves will deplete quickly, and cash flows will become negative if certain fundamental good rules and techniques are not followed, no matter how much cash they begin with.

Studies found that 82% of the time, poor cash flow management or a poor understanding of cash flow led to the failure of small businesses.

Why is effective cash flow management important to a small business?

Cash is what makes you successful. If there is good cash flow, your business will continue to be profitable and grow. Additionally, aside from just being financially sound, the absence of adequate or secure funding deprives a business of a host of benefits that other businesses have easily taken for granted, such as having workers paid regularly on time, access to capital when needed, and well-being support services—all factors which impact morale in the workplace. Consequently, if your small business is reporting negative cash flows, then you should consider its sustainability. You might be able to pay profits into the bank account each month like a major corporation, but that won’t help to raise sales and bring in more revenue. The time from start-up until financial stability can take years, or even never happen!

A business needs to generate enough cash from its activities so that it can meet its expenses and have enough left over to repay investors and grow the business. While a company can fudge its earnings, its cash flow provides an idea of its real health.

The cash flow statement is a financial report that tells a small business’s story by showing how much money it has coming in (cash) and how much money it is spending (operating expenses). This report can be helpful for investors, creditors, and managers because it helps them understand the health of a company and its ability to repay debts and invest in new businesses.

What to avoid in cash flow management for your small business.

Some of the following errors should be avoided when dealing with cash flow management in your small business.

1. Focusing only on selling and not invoicing

Even though sales are the foundation, you must invoice and collect to get money moving in your company. A lot of cash has been lost from inappropriate billing of work done or items supplied.

Low collection against sales can result from error-prone invoices, late invoicing, disputed amounts, and late posting. Invoicing allows you to keep track of every transaction made, which may be useful for analyzing performance even if you sell on a cash basis.

2. Unusually high accounts receivable

While sales are good and invoicing is on time, there might still not be enough money left to run the small business. This may be explained by poor receivables collection rates. If collection rates remain low, small business cash flow may suffer. Examine the amounts owed regularly and make sure that collection takes precedence over all else. In a subsequent article, we’ll provide additional suggestions on how to keep inventory low.

3. Not considering the marketing and overhead costs

The gross margins, or sales price of a product less the cost of that product, are usually the only factors considered by small businesses in determining sales prices. Yet, besides selling and distribution expenditures, marketing expenditures, and direct and indirect overhead expenses, such as salaries and leases, there are numerous more expenses involved in running the firm. There is a significant chance that margins will be low and net cash flow will be low or negative if these costs are not carefully considered while determining the sales price.

4. Not following standard accounting practices

For a variety of reasons, several small businesses depart from fundamental accounting principles. This will result in inaccurate financial and liquidity reports, which are key indicators that impact a company’s profitability and liquidity. When resources are mismanaged due to fraud and/or error, the reports will give a distorted picture of the company’s health. There is no way that effective cash flow management can occur in these circumstances.

5. Not separating personal and business expense accounts

Business deals are frequently done via personal accounts and vice versa for small business owners. More typically, business owners start to spend money from their company accounts since they believe the revenue generated by their companies is theirs. It is impossible to manage cash flows in the face of this indiscriminate spending. As a result, it is common for small business owners to buy a new vehicle using their business account and then find it difficult to make payroll payments.

6. Unorganized receipts and documents

Cash flow monitoring can become more complicated if receipts and documents are not kept in a neat and organized way. For example, if there is a disagreement with a previously paid vendor who claims they were not paid, the inability to produce a document may result in funds being lost since they would be paid twice. It is also possible that the taxman will refuse to allow an unreceipted payment due to a lack of documentation and slam additional taxes on the small business in the process.

7. Not tracking expenses accurately

Understanding the specifics of distinct types of costs as an owner of a small business is tough. This occasionally results in income statements with errors because they are posted under the wrong head. Overly copious amounts of money spent may be overwhelming for the company owner to track and may be overrun with paying too much for expenses that are not required.

8. Loans being taken as share capital

Lots of small businesses often consider personal loans as investments in their businesses. Loans are returnable while share capital is not. Confusing the two can lead to cash flow issues when repayment is due, especially as we have established that small business owners are disposed to take their cash out of the business first.

9. Not Formalizing Processes

Processes, structures, and agreements are all frequently not formalized in small businesses. In the event of any problem, this usually causes significant disruption in a small business’s cash flow. For instance, a company (and the owners in certain circumstances) may be liable for a large cash obligation in the event of any problems if a contract is not formalized to protect the business.

10. Taking the wrong kind of financing instrument

Business owners are sometimes inundated with many kinds of loans to boost their businesses. However, they are not properly briefed on the intricacies. For example, a business can take a short-term loan to finance a long-term project and find out that while the project is nowhere close to completion, the business is drowning in loan repayment and servicing charges.

11. Bypassing professional help

Maintaining proper financial and accounting systems should not be entrusted to those who do not have a thorough knowledge of the subject. You may want to reach out to an experienced professional chartered accountant to certify that records are correctly maintained, all reports generated are exact, and that you get the value of proper analysis of all past, present, and imminent events that will affect your business’ profitability (earnings) and liquidity (cash flow). The expertise of an accountant or finance professional is also useful in cash flow management.

Practical strategy tips to manage your cash flow as a small business

The following are a few tips to help your business manage cash flow:

• To ensure proper monitoring of your collection, keep your invoices up-to-date and in order.

• To save on cash flow and maximize sales, apply for tax deductions as you reduce costs; however, ensure that your revenue targets are matched in real terms, i.e., overhead cuts do not offend the existing customers’ perception of quality or service if new company goals are achieved through more aggressive pricing policies at the expense of existing customers.

• Always target the top and bottom-line profits to ensure that your cash reserve is better spent on future goals than paying off older debts. Ensure your debt outstanding does not exceed 50% of net current assets; any higher increases may make it more challenging for you as a business owner to borrow again in the short-term (6 months or less) since banks are reluctant these days to extend credit to unprofitable businesses with high liabilities like yours, and if you haven’t met your objectives for a certain period, you may experience difficulties attracting new customers or having to pay off older debts.

• Take advantage of any tax advantages that may help boost your current cash flow situation and reduce risks while wisely exploring potential growth opportunities, such as depreciation expense offset and employment insurance benefits.

• Institute strong controls around cash management in your business, e.g. restrict the handling of cash by employees, closely monitor bank reconciliation, ensure only top management has access to bank instruments.

• Consider all costs, even potential upcoming ones, when setting sales prices and review them regularly to ensure competitiveness.

• Strictly separate all business and personal expenses. If there is an overlap, e.g., using your car for business purposes, find a reasonable split for your records.

• Save yourself and your business from unnecessary losses by defining and formalizing all your necessary processes, structures, and agreements.

• Monitor your financial records regularly to avoid surprises.

• Owners should consider paying themselves a monthly salary from the business account and “dividends” from the business profits at the end of the year or any other agreed period. While strongly discouraged, any other owner’s “withdrawals” from the cash of a business should be seen strictly as a loan and must be paid back.

• Avoid taking long term loans to finance short term projects and short-term loans to finance long term projects.

• Do not take loans (or extend credit) to finance a project that has no inherent value relating directly to your primary business objectives.

• Invest in inexpensive cloud accounting software that enables you to perform accounting and bookkeeping functions on the go.

• Ensure compliance with all statutory and regulatory laws as and when due. Penalties for non-compliance can cause a huge dent in the cash balance.

• Reach out to a trusted accounting professional for help with strategic financial advice in the competitive market to optimize your cash flow. If you do not know a trusted accounting professional, reach out to us at myCFOng and we will connect you with one for free.

Conclusion

It’s not hard to see why small businesses struggle with effective cash flow management. By following the tips outlined in this blog, your business can avoid some common mistakes and finally start seeing positive financial growth!
Are you having difficulties monitoring your cash flows? Does it seem like you are always losing money? Do you need help implementing any of the tips suggested above? Or any other issue regarding cash flow management?

If you have any questions or concerns about cash flow management, don’t hesitate to reach out to us immediately. We would be more than happy to help in any way possible!