One of the biggest reasons behind why small businesses have to close their doors is bad cashflow management. Your cashflow is the amount of funds that are entering and leaving your business. As a small business owner, your primary objective is to generate more income than you spend.
Business related expenditures are part and parcel of running a small business. You’ll need to pay your employees, utility bills, suppliers, taxes etc., depending on the kind of business you own. Most small business owners assume that as long as you’re making more money than you spend in a month, then that’s enough for maintaining a good cashflow.
However, that’s just partially true. You see, you’re probably not going to spend the same amount on business operations every month. On some months, such as when you need to pay taxes, you’ll need to spend more. But more importantly, if the funds you have remaining after you’ve met your monthly expenses doesn’t cover your inventory for the next month, you could be in trouble.
To estimate your real profit, you need to discount all expenses related to business operations and management, and weigh them against your income. Earlier on, small business owners usually find that their profit margins aren’t as great as they expect. So how can you improve your cashflow management?
1. Inventory Management
Taking stock of your inventory on a regular basis is necessary for small business owners. If you find that a certain product is selling more than others, you’ll need to procure more of it. Similarly, if something isn’t selling as well as you hoped, you should consider not purchasing more of it. In fact, selling off goods and products that aren’t selling can bring in cash for your small business.
What you need to avoid as a small business owner, is consistently buying stock that isn’t selling or letting existing stock go to waste. Your inventory management strategy should be designed to sell off your entire inventory – either to customers, or to other businesses and suppliers. As long as you have inventory stocked on your shelves or in storage, that’s stagnant cashflow that’s not delivering.
You can also consider getting business insurance as a way to protect your small business from various situations. This can include your assets, plants and equipment.
2. Invoicing and Payment
Small business owners who fail to provide prompt invoices, or who extend lines of credit can face cashflow issues. The reason behind this is that until and unless your clients or customers pay you the amount they owe, those funds are not available to you.
Having an IOU can act as a reflection of future profits, but to run your small business, you’ll need funds. Turning to an invoicing software that sends out immediate invoices to clients/customers helps.
However, sending out invoices is just a part of securing your funds. The next step is to ensure that you’re receiving payment on time. You can do this by providing payment-related incentives, such as discounts or offers for early or on-time payment. You can also consider allowing alternative payments such as netbanking, payment gateways, credit cards, etc.
3. Create an Annual Budget
If your small business doesn’t already operate on a budget, then you need one immediately. Ideally, you should have a monthly as well as an annual budget. Think of it as short-term and long-term cashflow management.
Your monthly budget contains a cashflow statement on your average expenditure every month. This lets you know how much you can expect to spend. Anything over that amount should ideally become your profit. Your annual budget on the other hand, includes expenses related to paying taxes, loan repayment, and any other debts you might owe. This amount will show you how much you can ideally expect to save over the whole year, taking into account all expected expenses.
4. Forecasting and Long-Term Planning
Your cashflow management strategy should be aimed at scaling your profits over the long-term. Instead of focusing on immediate gains, your expenses and investment should aim to secure consistent growth. Small businesses that end up becoming sustainable and successful usually grow steadily over a period of time.
The trick to understanding how you can achieve this long-term growth plan is through forecasting. Forecasting utilises existing data about your business, in this case, your cashflow statements, and using that to decide how to better manage your cashflow. Using past data, you can isolate cashflow management areas where your small business can improve. Please remember that forecasts are estimations that are often correct, but not always. Your small business can encounter business disruptions, sudden growth or sudden failure etc. on the way to success. During such situations, remember to be flexible and amend your cashflow statements and forecasts accordingly.
Conclusion
Small businesses that have a good cashflow management strategy in place have a higher chance of building enduring success. Budgeting regularly, creating cashflow statements, and monitoring your accounts can help ensure that you’re consistently making profits from your small business.
You can also consider getting business insurance as a way to protect your small business from various situations. The more steps you take to improve your cashflow, the better the returns you’ll get.
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