Best Practices For Effective Cash Flow Management

No matter the industry you are involved in or the business model you employ, cash flow management plays a significant role in the success of your business. Whether you have a physical store or an online store, it is vital to handle your cash inflows and outflows carefully. As the saying goes, “Cash is King” and so, how you manage cash flow can ultimately make or break your career as a businessperson.

What is Cash Flow Management?

Cash flow management refers to the monitoring and control of the movement of cash within your business. This means handling and analyzing the cash inflows and outflows of your business. The cash inflows refer to the money that goes into your business - your sales and other investments. Cash outflows pertain to all the money that goes out of your business - your cost of goods sold and additional operating, financing, and investing expenses. As a business owner, your goal is to have more cash inflows than cash outflows. This would allow you to arrive, by year-end or end of the month, to have a positive balance of your cash flow.

Take note, however, that a positive balance of cash flow does not automatically mean that you earned a profit. Unfortunately, many business people make the mistake of being confident about this notion and end up making poor decisions for the business. Let us introduce you to two basic accounts that will primarily affect your cash flow management:

  • Accounts Receivable - this refers to the sales that the customers have not paid for in cash, hence, your “receivable”. If you compute your profit according to only the cash you receive, you cannot account for these receivables and can get a negative balance in your cash flow, which might translate to a loss in profit. While this is a common mistake to make, we want to help you avoid the headache and worry that comes with thinking you incurred a loss after all your hard work. Just remember that while your cash inflows are important, it is not always a reliable indicator of how much you have earned.
  • Accounts Payable - refers to the payments to suppliers (and other outside parties/vendors) that you have not yet made, hence, your “payable”. It is a very common mistake for business owners do not consider this when computing their profit. As an easier metric, business owners revert to looking at merely their cash outflows. This can lead to a wrong assumption that they are earning a profit. You should keep in mind that accounts payable are amounts of money that you owe your suppliers and that you will eventually have to pay. Now, if by the time you compute for profit and you have not paid for these, looking at merely your cash outflows and batting it against your cash inflows would cause a misrepresentation of your profit because you still have these to pay.

Image taken from Strikingly Product

Image taken from Strikingly Product

Thus, your accountants and financial advisors would tell you that part of managing cash flow is understanding that your positive balance at the end of the month or year can show many things. The key is being knowledgeable about the specifics of your cash inflows and outflows.

See, cash inflows and outflows don’t just come with the sales and expenses relating to them. Payments to suppliers usually cause while your cash inflows usually come from your cash sales (sales that have already been paid for in cash) and that your cash outflows, there is much more that you have to understand. Cash inflows do mainly come from the sales you made, but you also have to remember that receiving a cash investment from a partner or investor and/or getting a cash loan from the bank is also cash coming into your business. Cash outflows include the cost of goods sold and payment to suppliers but they also can include expenses paid for utility expenses, rent expenses, repair and maintenance, advertising expenses, capital expenditure, etc.

Managing your cash flow can be easier and more accurate if you know all these things. In addition, this new knowledge can also help you in planning how to manage cash flow more effectively and even come up with a plan to expand. Be mindful that small business cash flow management is usually easier to handle, considering the size, but is also often delicate to the minor changes in their daily cash inflows and outflows. Big businesses involve big bucks and while certain amounts of cash are not always significant to them, effectively managing cash flows is as important because there can be a lot to lose.

New to all this? You’re not to worry. We got you covered! We want to give you some tips on how to manage your cash inflows and outflows.

How to Improve and Manage Cash Flow?

• Get Back What You First Gave

It’s important to know and try to achieve your break-even. Break-even refers to earning back the amount of money you first invested. This means that you earn enough profit to get back what you initially gave to the company - this is after covering all the expenses involved in the business. Effective cash flow management can start with the desire to pay yourself or your investors back. If you properly manage the cash flows of your business, you can end up with a cash inflow and even a profit that is so much more than your breakeven point.

Image taken from Strikingly Product

Image taken from Strikingly Product

• Inspire Your Customers to Pay Fast

While we discussed how the cash you have on hand is not necessarily equivalent to your business profit, it is still better to receive cash payments upfront. The more money you currently have, the faster you can pay for certain expenses and the better you can manage cash flows accordingly. As a businessperson, you can think of and come up with fresh ideas on how to inspire your customers to pay fast. You can offer them special deals and discounts if they do so. You can set a certain time that the discounts apply to encourage your customers to pay within that timeframe and receive earlier payments. Whether you have set up on-site payments or online payments, it will benefit your business to get your hands on cash payments as early as possible.

• “Save For A Rainy Day.”

Even if your business is doing good, it is always smart to keep a contingency fund set aside. Setting a certain amount of cash you can use for emergencies and other purposes can help you have a more effective cash flow management since doing so would not affect or would even help your cash flow and/or profit at the moment you need it. Businesses should always have a reserve of cash so that in case things don’t work out like how they expect it to, they would have a buffer - something to hold on to and help them get back on their feet, should they need to.

Contingency Fund

• Your Expenses May Not Need to be so Costly

As a business owner who wants to be successful in the field, it is smart to be creative in some events and think of how maybe the problem is not with your sales or your pricing strategies but with your expenses. Make it a habit to evaluate the costs of your expenses. Try to find ways in which you can reduce them. That could mean getting a new deal with different suppliers and vendors that requires smaller amounts but offers the same quality or negotiating for a better deal with loyalty and experience as your leverage. It might also help your cash flow management to enter deals that have payment schedules that suit the time when your cash inflow is at its peak.

• A Friend Can Help

While there are many cash flow templates that you can find online, sometimes it can be better to hire someone to keep track of your cash flows. An accountant or a bookkeeper can offer services in this aspect. This would make your job easier since you leave the cash flow management of your business in another person’s hands. Whoever you hire would decide based on the cash inflows and outflows of your business along with other factors that have to be considered. They can also help you decide about certain transactions and even come up with a plan that would help your business grow.

• Attract More Buys and Purchases

The best way to improve your business cash flow is to have more cash sales or even just sales. No matter how efficient your cash flow management is, it would not make much of a difference if you do not sell enough to make a profit out of your business. This is where the special deals and promotions come into play. You can offer different deals and discounts to entice customers to buy more products and make more frequent purchases. You can also take your business to the different social media platforms and try to gather more customers from there. A sure-fire way to increase your sales significantly is to have your website where you can display and promote your products. Having your website can also allow you to set up pre-orders and accept orders and payments online. Turn your store into an eCommerce store and grow your business. Further reach means more customers and more customers means more movement in your cash inflows and outflows.

Strikingly is a website builder that you can rely on in building your website. It offers distinct features that can help you in building your brand and managing your business. You can incorporate blogs, contact forms and sign-ups, and even a social media feed.

Image taken from Strikingly Product

Image taken from Strikingly Product

And if you are entirely new to the world of eCommerce, Strikingly provides you with different templates that are used by established businesses all over the world. You can also build your online store with Strikingly. Doing so would help you incorporate different eCommerce features into your website. You can accept orders from your customers and accept payments that would go directly to your accounts. This can also assist you in managing cash flows from your businesses. Sign up or log in now and reap the benefits!

Image taken from Strikingly Product

Image taken from Strikingly Product

We hope this article has given you much insight and knowledge into how to employ effective cash flow management in your business. We hope that we have helped you to grow your business and take advantage of the tools that are at your disposal. You must manage your business and innovate on your products well, but it is also vital to know and understand how each move you make affects your resources your cash.