Nowadays, cash flow is an essential ingredient when it comes to entrepreneurship success, and it doesn’t matter the sector or the size of the business.
As an entrepreneur, being able to keep the cash coming in offers a lot of benefits when it comes to business finance. In fact, having a healthy cash flow will ensure that the business can continue to operate effectively.
Furthermore, it means you will be able to pay suppliers on time and ensure that staff, in particular, paid on time too.
Sometimes though, cash flow can be a problem and business owners and managers need to have tactics in place to manage this in the short term. If not, the problem could grow and the business could fold.
Tips for Managing Cash Flow
To effectively manage your cash flow, you need to be aware of the money that is coming in and out of your business. Using a tool like a cash flow worksheet will give you a view on this and will help to identify any issues before they turn into major problems.
It can also be used to predict future cash flows and to influence future business planning and strategy. Once you have a view on your cash flow, you can start to look at other areas in the business that can be used to better manage cash flow.
One of the best safeguards against having issues with cash flow is to have cash reserves. For a sole trader, or a small business, this may mean having some savings in the bank that can be used should business slow down or if clients haven’t paid invoices.
If you do not have cash in the bank, then you may need to turn to somewhere that offers a quick loan that can be used as a short-term tactic.
It’s not uncommon for some cash flow issues to arise from the late payment of invoices by clients and customers. When setting your payment terms, you should be setting them for as shorter time as is generally acceptable.
Implications of Bad Cash Flow Management
The ineffective management of cash flow in a business can cause significant issues. One of the most obvious problems is that it leaves the business with no money to pay suppliers, and, potentially employees too.
Not paying suppliers on time, in particular, can have the worst impact as they may add interest onto invoices where payments are late costing the business even more money.
This can be devastating and may lead to the business closing down in extreme circumstances. It may also lead to the business not being able to make money too.
If the business does not have the funds to buy in stock, raw materials, or machinery then it will be unable to create products to sell to generate cash and leverage itself out of the cash flow scenario it finds itself in.
The Importance of Cash Flow Management
Having enough cash in the business to keep it running effectively is in some cases even more important than making a profit.
Without cash, the business could lose contracts with customers and suppliers and eventually having to go into administration or closing its doors for good.
Keeping an eye on cash flow and having tactics in place to manage it will ensure that your business is managing cash flow effectively.