No matter how well prepared you are when starting a business, there will always be unexpected challenges. Whether it’s a shift in the market, unexpected developments in your staff or competition, or a supply chain issue, some twist or turn in the process will force you to change your plans and adapt.  

However, every new obstacle is an opportunity to learn something new. Running a business successfully in the long term requires understanding countless variables and mechanisms and learning how to juggle them all without letting the core of your business drop. 

As long as you seek out the appropriate expertise and learn how to respond to these new developments, your business will have a strong chance of making it through. Every business encounters challenges, so the important thing is how you adapt. 

One common challenge for many new small business owners has to do with managing cash flow. It’s not enough to be good at selling products and making money. For sustainable business growth, you need to have money at the right time to keep making money efficiently, and that’s what cash flow is all about. 

What Is Cash Flow?

A company’s cash flow is a measure of the money flowing in and out of a company. It’s not just about revenues and expenses, however. Cash flow measures your company’s liquid assets at a given point in time. 

This is essential because cash is king. It’s the oxygen that keeps your business functioning. Your profit margins may be in great shape, but if you don’t have the cash available when it’s time to spend it, then your business will suffocate. 

A cash flow statement is a document that zeroes in on the inflows and outflows of liquid assets. It can help you to assess your finances and make adjustments if your business needs more air. 

What Are the Different Kinds of Cash Flow?

Small businesses may see their cash flow patterns fluctuate significantly over time. However, there are two primary ways to characterize a company’s overall business cash flow at any given time: positive or negative. 

Positive Cash Flow

You have a positive cash flow if you are taking in more money than you are spending. This usually indicates a healthy profit margin, and it’s something to celebrate. It also means you have a surplus amount of cash you’re not spending. 

Negative Cash Flow

On the other hand, negative cash flow means that more money is flowing out of your business than is coming in. You’re spending a certain amount of your cash on inventory, advertising, and upkeep. Still, you’re not getting all of it back in revenue. This is likely to become a significant problem for your business if it doesn’t improve. 

How to Improve Cash Flow

Recognizing and understanding a problem is the first step toward addressing it. But once you have the data in your small business financial statements and see the issues with your cash flow, where do you go from there? 

There are many different possible strategies you can use to start to manage your cash flow better and improve your company’s long-term sustainability. The right mix of solutions for you will depend on the shape of your business and the particular challenges you face. 

1. Keep a Cash Reserve

Consider keeping a cash reserve of liquid assets for unforeseen expenses. You never know when you might need working capital to take advantage of an opportunity or respond to a change in the market. 

This might mean holding back some of your resources from buying inventory or investing in other regular operation costs, but it’s worth it to have some cash in reserve. Business credit cards can be a valuable part of this, as they let you schedule your payments around your own cash flow schedule. 

However, with a business credit card, you need to ensure you make your payments on time and avoid unnecessary additional interest costs. Your credit limit will depend on your company’s credit score.

2. Check Inventory

Take the time to examine your inventory. You want your investments to turn into cash that you can reinvest in more assets, so there’s a problem if your assets are getting held up at any point in the process. How quickly are you moving through your inventory? 

You always want to be well-stocked, but you shouldn’t be buying more than you need. Once you’ve had a chance to see how demand fluctuates, you should be able to plan your inventory without buying too much surplus. 

If you have parts of your inventory that are much slower to sell than others, consider what you can do to adapt. Perhaps that’s as simple as restocking less often, or you could try to improve or even discontinue that product. Assets in your inventory that don’t convert to sales are a drag on your cash flow. 

3. Collect Receivables

If you’re a business that tends to have a couple of invoices out waiting for customers to pay, then an important way to improve your cash flow will be to smooth out that process. The sooner you collect on the accounts that owe you money, the sooner you’ll be able to put that money to work.  

Reassess your invoicing process and do what you can to streamline your part of the process. Get invoices out quickly and make sure they are as clear as possible regarding payment terms and deadlines. 

4. Set Credit Requirements

If you’re going to offer your customers a line of credit on more significant expenses, you should consider requiring a credit check. You can’t afford to wait forever for clients to make their payments or cut your losses if they don’t pay. 

Set a reasonable standard of credit score requirements and offer different pricing and payment plans according to the customer’s credit score. 

5. Increase Sales

Another obvious possibility for improving your cash flow is to increase sales. If your inventory isn’t moving, you need to find a way to connect better with your audience and convert your products or services back into cash. 

Of course, increasing sales is at the heart of business growth, and it’s easier said than done. You might invest in improving your products or put money into new offerings. You could also work on a new marketing strategy and help more people learn about your company and what you offer. 

6. Manage Payables

You can’t take control of your cash flow simply by concerning yourself with the inflows, however. You need to manage your accounts payable, including your inventory costs and any of your other debts or regular payments like rent and insurance. 

Take the time to make sure you’re fully informed about all of the regular upcoming costs for your company so that you have the information all together. Using accounting software for your bookkeeping can help you keep track of these payments as well. 

If you see patterns or problems in making these payments line up with your flow of income, you can look into carefully scheduling your payments earlier or later to ensure you have the money when you need it. This might require negotiating with your lenders.   

7. Create Pricing Discounts

One way to encourage clients to pay early and improve your cash flow is with pricing discounts. Provide a financial incentive for them to pay you promptly according to your schedule.  

This strategy takes the stress of waiting for overdue payments and turns it into a win-win. If clients pay early, you can immediately turn around and reinvest that cash. If the client is late, then the price goes up, and you’ll make more money. 

8. Negotiate Supplier Costs

As you develop a good relationship with your suppliers, you may negotiate to cut down on costs or adjust your payment schedule. You could even offer to pay early on a specific schedule in exchange for a cut in costs. 

If you build a strong business partnership with your supplier, you should be able to find options that both support that partnership and improve your cash flow. 

9. Secure Loans

If you’re struggling with negative cash flow and there’s no obvious way out, it may be time for a larger adjustment. Applying for loans, whether they’re short-term or long-term, can provide you with just the injection of liquidity you need to invest in improving your cash flow.

If you wait for things to get too bad before you look for loans, you might make the process even harder, as many lenders will want to examine your finances and cash flow before committing to a larger loan.  

Investing in Better Cash Flow Now

Careful financial management can make or break your company’s chances of survival. Even a beloved company with a dedicated customer base can be sunk by poor cash flow management. That’s why it’s worth putting in the time and effort now to assess your company’s health and think proactively. 

While you’re still learning about small business financial management, you should consider hiring a professional to help you. A professional from 1800-Accountant can guide you through creating a cash flow statement and walk alongside you as you plan your next steps. 

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Written by Vincente Gomez

Vicente Gomez is a tax accountant for 1-800Accountant. He studied at Averett University where he received a double degree in accounting and ...