Scary but true: a lack of cash flow is one of the leading causes of small business failure. Fortunately, there are strategies you can use to ensure that you always have funds in your account to pay expenses and keep your business moving, like reducing your expenses or increasing revenues.
But before you can confidently plant your flag at the top of Mount Cash Flow, make sure you bone up on the subject. Whether you consider yourself financially savvy or not, there are some things you need to know about cash flow in order to succeed.
First: What Cash Flow Is
If you hear that term – “cash flow” – being thrown around a lot, but aren’t really sure what it refers to, read on. A business has cash moving in and out of its accounts: in through sales and out through expenses. In the ideal situation, you have more cash coming in than leaving your business. That means you have positive cash flow.
Now, cash flow is different than profit. After you’ve paid your taxes, your vendors and any other bills that your business accumulates, that money left over is profit. Technically, you could pocket all of that as your disbursement as the business owner. But what happens when those bills come due again and your clients haven’t paid you? Or you have an unforeseen expense, like needing to replace your computer?
That’s where having cash flow comes in handy. You never want your bank account to be at zero, because there will always be more expenses, and you need to be prepared for those. It’s frustrating for businesses that run lean, because often the profit is a business owner’s salary. Still, it’s important to keep money in your account if you want your business to grow.
Ready to become a cash flow master? Keep these three things in mind.
Your Cash Flow Cycle Affects Your Ability to Pay Bills
Every business has a different cash flow cycle. This refers to how long it takes from the moment you receive an order to deliver goods and receive payment. If you make homemade baby diapers, you need time for the following:
- Ordering materials
- Sewing the product
- Packing the product
- Shipping it
- Receiving funds from credit card transactions
How long your cash flow cycle is will drastically affect your cash flow. If your money is tied up in inventory, you can’t use it to pay vendors. Some businesses have tremendously long cash flow cycles, and they have to do some pretty strategic planning to ensure they can keep the lights on while they’re waiting for their investment in the actual production of a product to be returned.
You can improve your cash flow cycle a few different ways:
- Buy smaller batches of inventory (you may pay more per item, but you’ll tie up less cash)
- Hire staff to help you make products during busy seasons
- Require payment for an order up front
The Higher Your Profit Margin, the Better Your Cash Flow
If you haven’t stopped to look at your pricing lately, now is a good time. If you’re charging too little, you’re having to work extra hard to keep cash flowing. On the other hand, if your profit margins are higher, you’ve got more cash to work with (and that makes that cash flow cycle easier to deal with, since you should have money in the coffers). Here are tips on pricing:
- Look at what your competitors are charging, and price accordingly
- Offer extra value to justify a higher price
- Increase pricing just for new customers to keep old ones happy
Certain Investments Can Net More Revenue
It seems counterintuitive to say that spending more on your business could help you make more, but it’s true. If you’re spending 5 hours a week managing your own accounting (or marketing, etc.), that’s time that you could be spending on your brand’s growth strategy. Hiring an accountant, marketer or even assistant can free you up so you can find ways to improve your cash flow.
Remember: an investment in your business is one that will secure its future. It’s scary when you start spending more money on it, but in the long run, it will always pay off.
You Have Options to Boost Cash Flow
Income isn’t necessarily your only option to keep cash moving in and out of your business. You can also consider small business financing options like a working capital loan so that you have money in your account when you need it.
Having positive cash flow takes a little advanced planning to ensure you’re never in a tough spot and unable to pay your bills. But keeping these four things in the front of your mind, you should be able to successfully ensure that your bank account always has available funds.
Have you ever taken out a working capital loan to help boost cash flow? Was it a good move for your business? Let us know in the comment section below.