BBB Business Tip: Cash flow best practices every small business should adopt
BBB® Tuesday Tip
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As a small business owner, you know how important it is to maintain a steady cash flow. With the high cost of doing business in today's economy, however, many small businesses are struggling to keep their cash flowing freely.
Below, we will go over the best cash flow practices that you can implement to help you manage this essential aspect of your business, even as costs continue to rise.
The importance of proper cash flow management
Many small businesses operate on very slim profit margins. If a small business doesn't generate enough revenue to cover its expenses, it will fall into a deficit and begin to lose money.
The most frequent reason that small businesses fail is cash flow management issues, with 82% of failed small businesses citing cash flow problems as a primary factor.
Managing your cash flow is essential, not only for profitability but for long-term survival. If your small business doesn't have the cash to cover expenses, it will ultimately be forced to shut down. Then, not only will you be out of business, but you may need to liquidate inventory, equipment, and other assets at a fraction of their original value.
Managing your cash flow is all about making the right decisions regarding spending and generating revenue. It's not always easy to know which expenses are critical and which can be cut back or eliminated. It can be even more difficult to know when to invest in a new sales opportunity, especially when your resources are limited.
By implementing a few cash flow best practices, however, you can keep your business healthy and profitable.
5 cash flow best practices worth adopting
Every small business owner needs to have a good handle of their cash flow to ensure they can cover their expenses and remain profitable. These five cash flow management best practices will help you manage this important aspect of your business:
1. Send invoices promptly and collect outstanding debts
Maintaining a steady cash flow requires you to ensure that your payments are processed quickly and that all outstanding debts are promptly collected. Small businesses that work on an invoicing system rather than a direct payment model need to be especially attentive about sending invoices immediately after services have been rendered. Paying your bills and being paid for your services on time is critical for keeping your cash flow steady, and it reduces the possibility of receiving unexpected charges.
2. Conduct weekly cash forecasts
One of the best ways to ensure that your cash flow is being properly managed is to conduct a weekly cash forecast.
A cash forecast is a financial projection that indicates how much cash will be coming in and going out throughout a specific timeframe, such as over the next week, month or year.
By taking a close look at your cash flow every week, you can better understand where your money is going and make more informed decisions about how to invest your resources.
3. Reduce your variable costs where possible
Many small businesses make the mistake of investing in non-essential expenses when they’re cash-flow positive. When cash flows freely, it’s natural to want to spend money to grow your business further. However, the best way to ensure that your cash flow remains steady is to reduce your variable costs where possible.
In other words, focus on reducing the costs that can be cut back or eliminated entirely without having a significant impact on your business’s core operations. This will optimize your cash flow and help your business operate as efficiently as possible.
4. Lease equipment
It can be tempting to invest in whatever machinery, equipment, and other large purchases seem necessary to meet growing demand. However, this can quickly become a cash flow drain if you aren’t careful.
Instead, it’s often better to lease expensive machinery, equipment, and vehicles. This way, you won’t have to pay the high purchase price, but you still get to take advantage of all the benefits of having the equipment when needed.
5. Develop multiple sales channels
Another great way to keep your cash flow steady is to develop multiple sales channels. This not only increases the amount of revenue that you generate but also ensures that you have a reliable backup plan if one of your primary sales channels begins to slow down.
Get more cash flow tips from the BBB
Don't let cash flow management keep you up at night. Instead, take steps to optimize your cash flow, so you never have to worry about making ends meet. This will not only improve the health of your business, but it will also provide you with the peace of mind that you're operating as efficiently as possible. |
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BBB of Northwest Florida
912 E. Gadsden Street
Pensacola, FL 32501
850.429.0026 |
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Contact:Tammy Ward, Communications Directortammy@nwfl.bbb.org, (850) 429-0002