Money. Money. Money. It is what your business needs to be successful and survive. For many owners, they are unsure of how to handle their finances and struggle to improve their cash flow.
Cash flow is defined as the amount of money being transferred in to and out of a business through sales and expenses. Stable cash flow is essential to the success of your business and there a few steps to help you increase your current cash flow.
The first step to improving your cash flow is to understand what is going wrong. Many businesses go wrong not because their product doesn’t sell but because they make these common mistakes:
- Not watching their cash flow
- Taking too long to bill clients
- Expenses are too high
Some owners ignore their cash flow; they only want to be a part of the “fun stuff”. Ignoring your cash flow is the biggest mistake you can make. You have to be aware of not only what spend but also on how much money you are making. Cash flow statements are essential to understanding how your business is operating and how it can be improved. If you fail to notice your cash flow you could be spending money you don’t have.
Clients will only pay you when they receive a bill. So delaying billing will only delay you collecting money for your product or service. You should aim to have all invoices sent to the client within a week of the service. Delaying billing not only delays your cash flow but also portrays the idea that clients can take their time in paying their bills, which doesn’t benefit your business.
Another common issue which causes cash flow problems is having high expenses. Every business will have costs; but when expenses are consistently too high, you are continuously generating negative cash flow.
IMPROVING CASH FLOW
Forecasting is creating an overview of your predicted cash flow. A forecast can be weekly or monthly. A rolling 13-week forecast is recommended to understand your cash flow and to prepare for the months ahead. A forecast includes all funds being paid by clients; it is essential to keep in mind the terms of the payment.
All fixed expenses; these are your mortgage and loan repayments, bills, rent, and wages. To have an accurate forecast looking back at past expenses and sales averages to ensure the forecast remains accurate.
Accurate forecasting will allow you to identify issues and make the necessary changes. If it is predicted that expenses will be higher than estimated profit, you can take steps to reduce costs and increase sales. Through forecasting effectively you will be able to understand your current cash flow and make changes to improve future cash flow and financial standing.
Improving sales is the most obvious way to improve your cash flow, however, improving sales can be difficult especially without generating greater expenses. A few tips for improving sales are, to firstly have a strategy, a target market and a plan on how you are going to communicate your value proposition. Knowing who you are targeting means, you can engage with them effectively and efficiently.
Secondly, identify the opportunities available. Opportunities include generating revenue through existing customers and current product/services or branching out to new customers and products.
Finally, when aiming to improve sales, it is essential to measure changes along with your process. Measuring how many leads turn into sales, and retention rate will provide insight into your current sale process and where issues lie. Measuring changes in sales allows you to identify if your strategy is working or if further changes need to be made.
Profit and expenses
Improving sales as mentioned above will directly result in an increase in profit which in return will boost your cash flow. To continue to improve your cash flow, you should analyse your expenses. Expenses are categorised into two main groups, fixed and variable expenses. Fixed expenses are your loan repayments, electrical bill, and staff wages, etc. they remain constant each month. Variable costs are the costs of purchasing materials, purchasing office supplies or repairing of machinery varying month to month.
A simple way to reduce your variable cost is to identify the quantity of materials being purchased if you are carrying stock that won’t be sold for a period you increase your risk and unnecessarily raise expenses. Reducing expenses through only acquiring the materials you need, will allow you to improve your cash flow.
Evaluate your Financing
Almost all companies will seek financing at some point or another. For a loan to benefit your business and its cash flow, it is crucial you analyse what the terms of the loan will do to your cash flow. For it to not negatively affect your cash flow, it is essential the terms of the loan are suited to your business and its financial standing.
Evaluate if the amount is repayable? Can you still operate and pay the necessary expenses while making repayments. Is the length of the loan to aggressive? Will you need more time than agreed to repay the loan? And is the interest rate reasonable? Analyse how much money the loan will cost you.
Ensuring your financing is manageable will give you room to focus on enhancing your profits rather than focusing on how to manage and repay your high expenses.
In review, improving your cash flow is achievable by actively looking at your business’s operations and finances and make the necessary changes.
About the author:
Claudia Beck is a writer with a passion for entrepreneurship, small business and health currently living in Perth, Australia