Many small businesses operate with very thin profit margins. If a small business does not generate enough revenue to cover its expenses, it will run into a deficit and start losing money.
Cash management issues are the most common reason small businesses fail, with 82% of bankrupt small businesses citing cash flow issues as the primary factor.
Managing your cash flow is essential, not just for profitability, but for long-term survival. If your small business doesn’t have the cash to cover its expenses, it will eventually be forced to close. Then, not only will you go bankrupt, but you may have to liquidate inventory, equipment, and other assets at a fraction of their original value.
Managing your cash flow is all about making the right spending decisions and generating income. It’s not always easy to know which expenses are critical and which can be reduced or eliminated. It can be even harder to know when to invest in a new sales opportunity, especially when your resources are limited.
However, by implementing a few cash flow best practices, you can keep your business healthy and profitable.
5 best cash practices to adopt
Every small business owner needs to have a good handle on their cash flow to ensure they can cover their expenses and stay profitable. These five cash flow management best practices will help you manage this important aspect of your business:
1. Send Invoices Promptly and Collect Outstanding Debts
To maintain a stable cash flow, you must ensure that your payments are processed promptly and that any outstanding debts are promptly collected. Small businesses working on an invoicing system rather than a direct payment model should be particularly careful about sending invoices immediately after services have been rendered. Paying your bills and getting paid for your services on time is essential to keeping your cash flow stable, and it reduces the possibility of receiving unexpected charges.
2. Make weekly cash forecasts
One of the best ways to make sure your cash flow is properly managed is to do a weekly cash flow forecast.
A cash forecast is a financial projection that shows how much money will come in and go out over a period of time, such as the coming week, month, or year.
By taking a close look at your cash flow each week, you can better understand where your money is going and make more informed decisions about where to invest your resources.
3. Reduce your variable costs where possible
Many small businesses make the mistake of investing in non-essential expenses when they have positive cash flow. When money is flowing freely, it’s natural to want to spend money to further grow your business. However, the best way to ensure that your cash flow remains stable is to reduce your variable costs wherever possible.
In other words, focus on reducing costs that can be reduced or eliminated entirely without significantly impacting your core business operations. This will optimize your cash flow and help your business run as efficiently as possible.
It can be tempting to invest in machinery, equipment and other major purchases that seem necessary to meet growing demand. However, this can quickly become a waste of cash if you’re not careful.
Instead, it is often better to rent expensive machinery, equipment and vehicles. This way, you won’t have to pay the high purchase price, but you can still enjoy all the benefits of having the equipment when you need it.
5. Develop multiple sales channels
Another great way to keep your cash flow stable is to develop multiple sales channels. This not only increases the amount of revenue you generate, but also ensures that you have a reliable back-up plan if one of your main sales channels starts to slow down.
Rick Walz is the president and CEO of the Better Business Bureau Serving Northern Indiana, which serves 23 counties in the northern part of the state.