Poor cash flow management has been the downfall of many businesses so it can’t be left to chance. A regular supply of cash is vital to any organisation, so that it can pay salaries and bills, as well as invest in growth. This is why cash flow management is essential in order to have a thorough understanding of where your money is coming from and to project future revenue to secure company growth.
In this article, we provide guidance and answer your most-asked questions related to small business cash flow management: what is cash flow management, what are its benefits and what to do for a better cash flow management?
Let’s start by providing you with a cash flow management definition: it is the process of tracking and optimising your cash flow in a given time period. More concretely, it means analysing the money you receive – generated through sales for example – compared to the money you give out when you pay bills, salaries, taxes, etc.
Cash flow is different from profit, which is the sum of money remaining once all the costs associated to producing and delivering a product or service have been deducted.
When the difference between cash coming into and out of your business is negative at the end of a given period, it means you have less cash than the opening balance you had at the start of that period.
The objective of cash flow management is to avoid this by keeping track and optimising your cash flow, and to ensure that your cash inflows (cash receipts) are always higher than your cash outflows (cash expenses). The surplus can for example help you invest and grow, but there are many other benefits to sound small business cash flow management.
Here is a list of the top seven key benefits of cash flow management:
- Paying your employees on time
Your staff helps you keep your business running, so paying them on time is essential. It’s a basic and fundamental element to retain their loyalty and attract talents. Thanks to solid cash flow management, you ensure you reserve cash for their salaries.
- Purchasing what you need to create your product or deliver your service
Another of the multiple benefits of cash flow management is that it allows you to have a clear forecast of your account payables, which enables you to purchase the raw material or services you need to fulfil your orders. A potential surplus could also help you expand your product line.
- Paying all your other expenses
Whether they are taxes, loan repayment or other bills, good cash flow management will allow you to keep track of all your past, current and future expenses, so that you can plan accordingly and ensure these expenses will be paid on time.
- Planning and coordinating your activity to maximise profit
Planning is essential for any business and the lack of it may lead to disaster. One of the benefits of cash flow management is that it helps you plan, analyse performance and make a maximum available profit from your current activity. It will also enable you to prepare the financial budgets for the years to come.
- Keeping cash reserves and avoiding overspending
Without a sound cash flow management, you won’t monitor how much you spend and might overspend or use cash needed for something else. The analysis of your cash flow statement can help you determine whether the financial condition of your business is in a stable, excess or shortage state. Thanks to cash flow forecasts, you gain control, monitor your spending, determine your liquidity and profitability, and ensure you will have sufficient cash reserves in case of unexpected expenses or bad debts.
- Expanding or growing your business
Another benefit of cash flow management is to allow your business to be opened to investments and growth opportunities. Indeed, thanks to your cash flow statement analysis, you are able to identify the ratio between your income and expenditure, which helps you assess the current financial position of your business and take budgeting decisions. For example, if you have a surplus, you can decide to develop new products or services, expand to a new market, etc.
- Getting a business loan
Many businesses depend on banks or other financial institutions to finance some of their activities. In case of cash deficit, you might contact them for a loan to overcome the situation. Before granting you the loan, banks study the financial condition of your business and your ability to repay the amount. Thanks to cash flow management, you will be able to use your cash flow statements as proof and provide all the details regarding your cash inflows and outflows.
In summary, good small business cash flow management will grant you peace of mind by enabling you to ensure you can meet all your obligations, run your business more effectively and concentrate on your growth.
To ensure you have a positive financial situation and avoid cash flow problems, here is some advice we recommend you to follow:
- Make cash flow forecasts regularly so that you can project your cash flow position – the income you’ll get (estimate your volume of sales, etc.) and how much money you’ll spend (forecast the expenses you’ll have to make, how much your will order, etc.) – and act on the conclusions.
- Research potential new customers thoroughly and analyse their creditworthiness by obtaining their financial rating, calling on local partners to gain insight or using alternative intelligence.
- Manage late invoices to avoid bad debts: follow credit control best practices for faster payment by invoicing your customers as soon as possible, setting up clear payment terms, as well as implementing a process to ensure your invoices will be paid on time and define what to do in case of .
- Be alert to emerging threats, including debtors, any extra-large bills and loan repayment dates.
- Avoid overspending and ensure to make sound investments: before making a big investment or expanding your business, always consider what impact it will have on your cash and research the sectors or markets to fully understand the context.
- Keep cash reserves by saving a proportion of your cash to cover unexpected liabilities.
- Train your team to basic credit control principles (or hire people who know them) for a better cash flow management.
- Use a digital cash flow management software that can help keep track of invoices and expenditures, and provide a clear picture of your cash position.
Despite all the above, you might want to ensure your business is protected against credit risk by taking out a trade credit insurance policy. Trade credit insurance and export credit insurance help you secure your cash flow by covering your receivables due within 12 months, helping you to avoid bad debt and compensating you in case it happens. This is one of the best ways to complement your small business cash flow management.