2020 might have been a rough year for businesses, and your small business could still be taking time to recover. But to keep your small business going, you must understand your small business’s finances and manage every aspect of these finances.
Among other reasons, lack of proper financial management is one of the key reasons small businesses fail. Never before has this been truer than now when access to funding and a shrinking customer base is a daily routine for many companies. But with proper management of the little cash your business has, it might survive this slippery slope.
What is Cash Flow
You must be aware of many finance and accounting as an entrepreneur, and cash flow is one of those. It refers to the net movement of money, real or virtual, in an account. In other terms, it is the net of all the cash that comes in and goes out of your business.
A negative cash flow means your business’s accounts are in a deficit, while a positive cash flow means the business accounts add their reserves. While a negative cash flow is not always a red light, and many businesses get to this phase, it’s important to ensure the account does not remain in a negative state for long.
One of the best ways to track your small business’s cash flows is through the cash flow statement, which is part of the financial statements every business uses to track its financial health. We would also recommend having some savings to manage the day-to-day business expenses. Think of it as your business’s emergency kitty that you can rely on when there is little money coming in.
Ways to Improve Your Start Up’s Cash Flow
Track Every Process
It is not easy to manage anything unless you keep track of everything regarding the business expenses and income streams. Luckily, numerous accounting software systems can help you with this. They have online access and apps to always capture expense receipts on the go and even bank checks online. It allows you to keep your accounting entries up to date.
With your accounts payable and receivables daily, you will always know how much money the company has, and you can budget for this. It will also enable you to know when money is coming and what needs to be paid by what date to avoid accumulating fines and penalties.
Besides keeping in touch with the current cash flows, we would also recommend a cash flow forecast based on historical data and expected expenses and revenues. The data might change but working with a template for the future enables you to have a solid base on what to expect in the future.
Reducing business expenses is always a key to managing the cash flows. Maybe the rent is too high, and you actually need part of the office space you are paying for. Or there are a few redundant staff positions you can get rid of. Alternatively, you can hire contractors or freelancers to reduce payroll. If some of your staff can work from home, especially now that jobs are going remote, it can help you minimize required office space and rental payments.
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How about other business services from different vendors, like insurance policies, air conditioning, among others. Is there a way to negotiate for these and get lower and more affordable packages? Sometimes, it is better to explore all the options you can get to have your vendors reduce prices rather than sitting on it while your business suffers.
Negotiate Payment Terms
Some of your vendors might not lower the prices, but you might succeed in negotiating for better payment terms. The goal is to prolong payments to your vendors as long as possible without attracting any fines or late payments.
Don’t just negotiate with your vendors, try getting better terms with your customers who pay on credit and reduce the credit terms. If the clients pay after 60 days, try negotiating to 45 or 30 days, even if it offers them a small discount. The aim is to have the money coming in sooner than later, and many business people will take the opportunity to small some money by paying in advance.
Negotiate the Debts
If your business has any debts, like long-term loans and credit card debts, try to negotiate with the lenders for better terms. Many creditors offered lendees better terms during the pandemic, and you might still get an opportunity to negotiate. You can have the debt repayment period extended or lower interest rates.
Can You Increase Prices?
It might seem like an unnecessary step when many people are struggling, but if your competitor’s prices are very high and you can increase the margins by adjusting the prices upwards, then do it.
Consider Invoice Financing or Factoring
If you are sitting on invoices that the clients will not be paying anytime soon, you can use invoice financing or factoring. The financing or factoring company will use the invoices as collateral to lend you money, and they can recover their money when the client pays. The best option here is to explore this strategy with your accountant and see whether it makes sense. The factoring company will, of course, charge some fee. Whether or not that is worth selling your invoice for shirt term financing is an issue your accountant can advise best.