Whatever size business you own, one thing holds true across small, mid-size, and large businesses: Cash flow is the bread and butter to your business’s survival and success.
Let’s start by answering the question: What is cash flow? Cash flow represents the totality of cash activities coming in and out of a business that is typically used by business owners to help them determine where to increase their revenue sources and/or decrease their spending and expenses. At the end of the day, cash flow is one of the most important aspects of maintaining a thriving business.
What kind of insights can cash flow reveal, and why are they important?
A cash flow statement reveals whether you have a negative cash flow or a positive cash flow, which can help you resolve how to augment and increase your cash transactions.
A positive cash flow indicates that your business is bringing in more cash than its spending, while negative cash flow indicates the need for a business to evaluate ways to reduce its cash expenses. Even if you’re bringing a ton of money into your business, you’ll still have cash flow problems if you’re spending more than that amount or if you have outstanding debts that make you unable to make your payments. Many businesses have become subject to financial failure as a result of poor cash flow management.
Additionally, it’s important for business owners to understand where and when they’ll have cash in their hands. Let’s say that you’ve completed a few projects for some clients, you’ve invoiced them, and now you’re waiting for them to make their payments. The payments you’re expecting to collect are recorded in your accounts receivables but you don’t have the physical cash yet. Not keeping track of your cash flow statement or bookkeeping can put you in a difficult position where you can’t make the payments you need to because you don’t have the money you need.
Ultimately, cash flow lies at the heart of your business’s finances and can be a major determinant of how you decide to enhance your profit margins and grow your business further.
So how can you maintain healthy cash flow management practices?
At Financial Optics, we empower large and small businesses to make the best financial decisions by helping them break down and understand their financial information. We believe in equipping you with the best tools and expertise for long term success.
To make it easier, we’ve thought of 5 methods that you can employ to strengthen your cash flow management:
1) Drive up your revenue – We know what you’re thinking: Isn’t this what all growing businesses want? Increasing business revenue is often much easier said than done, and is generally the ultimate goal for most business owners. After all, what business doesn’t want to make more money?
But how can it be done? Well, let’s talk through some of the practicalities. A few ways you can increase your business’s revenue is by bringing in more customers, increasing prices and average sale amounts, and boosting the number of your purchase transactions. Many of these methods are linked to other business functions such as marketing, fostering relationships with clients, and establishing client loyalty.
2) Reduce your spending where you can – Reducing your spending and expense amounts is a foundational concept for cash flow management in general, both in professional and personal terms. Cutting down unnecessary spending and extraneous expenses can actually add up more than you think, making it more likely for you to reflect a positive cash flow on your cash flow statement.
3) Keep a cash reserve – Maintaining a cash reserve extends you flexibility in the event that something out of your control happens. Whether it be a client falling behind on payments, an economic decline due to a global pandemic, or any other unexpected expenses, having about 3-6 months worth of cash on hand to put towards expenses can grant you peace of mind.
4) Create advantageous invoice agreements – Set up invoice conditions and deadlines that are advantageous to both parties, but particularly for your business. This can include incentivizing clients with discounts for early or timely payments, or asking for a cash advance for projects that require hefty upfront payments for materials and equipment. Being proactive with your billing and invoice system can help you maintain more cash on hand and benefit your business.
5) Keep track of your bookkeeping and cash flow statements – In many cases, some business owners who are not on track with their bookkeeping may not be aware of how much money is backed up in their accounts receivables or exactly how much cash is going out versus the cash that’s coming in. Staying on top of your financial reports such as income statements and balance sheets in addition to your cash flow statements is the best way to make the most informed financial decisions for your company.
At Financial Optics, we help you focus your attention on the current status of your cash flow management practices and provide insight into how they can be optimized to bring you the best results and enable you to make the smartest decisions for your business. Finally, we take this information to the next level by determining forward focused strategies that will serve as a launching pad for your cash flow management and help you look towards building a healthier, stronger business.
Start a conversation with us today to find out more about our cash flow management services.