Cash flow numbers are really important in finance. Whether you run a business or just want to handle your money better, knowing about cash flow is crucial. It shows how healthy and sustainable your finances are.
According to Investopedia, a big reason small businesses don’t make it is cash flow issues. Surprisingly, 20% of them don't survive even the first year.
In 2024, for businesses to do well, they need to be open to using new trends and technologies for handling their money. Here are some tips to manage your cash flow better this year and cope with financial changes.
Cash Flow Management Tips to Apply to Your Business
Problem 1: Misreading Cash Flow and Profit
Cash flow is about tracking how money moves in and out of a business. Profit, however, is what's left over after you take away all the costs from what you earn.
One mistake people often make is thinking that if their business is making a profit, they must be doing fine with cash flow too. But that's not always true. You can have a profitable business but still struggle to pay bills on time because the money isn't coming in when you need it.
On the other hand, you might have positive cash flow, meaning money is coming in regularly, but you're not making a profit because your expenses are too high.
For example, let's say you bought smartphones for $400 each and sold them for $500 each, thinking you'd make a 25% profit. But when you look at all the costs involved - like transaction fees, shipping, rent for storage space, and returns from customers - you realize that you're just breaking even.
So, it's important to keep track of all your expenses and subtract them from your earnings to make sure your business stays healthy both in terms of cash flow and profit in the long run.
Pro Tip: Create an Effective Cash Flow Forecast
Get Good Data - Collect past financial info like sales, expenses, and payment history.
Predict Sales - Estimate future sales by looking at past performance and what's happening in the market.
Track Expenses - List all the costs you expect, like rent and materials, and remember to think about taxes.
Know When Money Comes In and Goes Out - Figure out when you'll get paid by customers and when you have to pay bills.
Prepare for Surprises - Set aside extra money for unexpected expenses or if you don't make as much money as you thought.
Check and Update Regularly - Keep an eye on your forecasts and adjust them as needed by comparing them to what happens.
Problem 2: Lack of Cash Reserves
Unexpected events like economic downturns, natural disasters, or sudden expenses can mess up a business's money situation. Having some cash saved up helps you handle emergencies without having to borrow money or cut important stuff from your business.
Also, it lets you take advantage of good chances, like growing your business, investing smartly, or buying things you need. Plus, it helps you react quickly to changes in the market and encourages new ideas.
Pro Tip: Determine the Ideal Cash Reserve
Think about saving enough money to cover your fixed costs like rent, utilities, and salaries for three to six months.
Put aside some extra money for unexpected costs or opportunities like marketing or repairs.
Look at how fast your business makes money in tough times by checking past sales and industry trends.
Think about any special risks your business might have. Some industries need more money saved up for emergencies because they can be unpredictable.
Problem 3: Flawed Credit Management
Good credit management is crucial for any business to keep its finances healthy.
Not handling credit properly can cause serious problems, especially with cash flow:
If customers frequently delay paying, it can seriously reduce the money coming in.
Money stuck in unpaid bills can't be used for urgent expenses, leading to shortages and trouble paying bills on time.
The more credit you give, the more likely some customers won't pay you back.
Without good credit management, unpaid bills can pile up, making cash flow even worse.
Pro Tip: Implement Effective Credit Control Strategies
Credit Policies - Make rules for how customers pay you, like when payments are due and what happens if they're late. Tell your customers about these rules.
Credit Checks - Check if new customers can pay you back before you lend them money. This helps you avoid risky customers and decide how much credit to give.
Invoices - Send clear and accurate bills quickly. Include payment details and how to contact you.
Credit Limits - Decide how much credit each customer can get based on how reliable they are with payments. Review and change these limits when needed.
Monitoring and Follow-up - Keep an eye on the money people owe you. Consider having a team dedicated to Accounts Receivable (AR) to track and remind customers to pay on time. You can use tools to automate reminders if needed.
Problem 4: Spending Beyond Means
Spending too much money and not managing costs properly can cause big problems for a business's money flow.
When a business overspends, it quickly uses up its cash.
This overspending can happen because of unnecessary expenses or not keeping an eye on how much it costs to run the business. It means the business doesn't have as much money left to pay important bills and staff wages.
If overspending keeps happening, the business might end up owing a lot of money, often by taking out expensive loans or using credit cards too much.
Plus, when there's not much money left, it's hard for the business to grow, invest in new ideas, or deal with unexpected money issues.
Pro Tip: Strategic Control of Expenses
Check all your overhead costs carefully. Find unnecessary expenses and focus on the ones important for your main business activities.
Talk to your suppliers to get better deals, and discounts, or buy in bulk. Good relationships with suppliers can save you money.
Use technology to make tasks easier and cheaper. Automate things you do over and over to work better.
Think about letting employees work from home to save on office costs.
Buy equipment and use methods that save energy to lower your utility bills.
Problem 5: Inventory Mismanagement
Poor management of inventory can severely affect a business's money flow:
Holding too much inventory ties up a lot of money that could be used for other important things, like paying bills or growing the business.
Keeping too many products in stock means spending more on things like storage and insurance. If those products don't sell quickly, it can strain the business's money flow.
Products sitting in inventory for a long time might become outdated or useless. If that happens, selling them at a loss can hurt the business financially.
On the other hand, not having enough inventory can mean missing out on sales. If customers can't find what they want, they might shop elsewhere, which affects how much money the business makes.
Pro Tip: Handling Cash Flow Issues Tied to Inventory Management
If you're short on money, check how much stuff you have in your store. Find things that aren't selling well or are old, and think about selling them at a lower price to get some quick cash.
Talk to the people you buy from and see if you can pay them later than usual or if they'll give you a discount if you pay them early.
Think about having sales or special deals to get more money in quickly.
Look into getting loans or credit lines that are specifically for buying more stuff to sell when you're low on cash.
Change how much stuff you order and keep in stock based on what people are buying and what's going on in the market.
Save some money to use when you're not making as much.
Sell different kinds of things so you're not only relying on stuff that only sells well at certain times or to certain people.
Inventory financing lets you get cash by using some of your inventory as collateral. You can use this money for different things like buying more stock, running your business every day, or seizing chances to grow. It works based on the value of your inventory, which is calculated using AI to see how well it sells in markets.
Problem 6: Failure to Review Pricing Strategies
Pricing plays a crucial role in how a business manages its money in several ways.
The price you set for your products or services directly affects how much money you make. Charging higher prices can bring in more money if people are willing to pay, but charging lower prices might attract more customers even though it means less money coming in at once.
Your pricing strategy also affects how much profit you make. If you set prices too low, you might not make much profit, but if you set them too high, you might not sell as much.
If you let customers take a long time to pay you, it can take longer for you to get the money you've earned. This can make it harder to manage your money and pay your bills on time.
Your prices also affect how you compare to other businesses in the market. If you charge a lot more than your competitors, you might lose customers, but if you charge less, it could start a price war that hurts everyone's profits.
So, it's important to think carefully about how you set your prices to make sure you're managing your money well.
Pro Tip: Refine Pricing Strategies
Group your customers based on what they're willing to pay. Offer different prices or services to different groups.
Raise prices slowly over time, letting customers know in advance. Show them how they'll get more value.
Give extra services to justify higher prices. Make sure the customer experience keeps improving.
Combine products or services to make them seem like a better deal. People are more okay with higher prices if they get a lot in one package.
Test different prices to see how customers react. Use feedback to make your prices better.
Tell customers why you're changing prices and how it helps them. Be open about the reasons behind the changes.
Problem 7: Overlooking Seasonal Cash Flow Patterns
Not paying attention to the ups and downs of cash flow throughout the year is a common mistake that can seriously affect a company's financial health. Here's how it can happen:
Sometimes sales boom at certain times but drop at others, making cash flow unpredictable.
Businesses that thrive during specific seasons might need to stock up on goods before busy times, which ties up money in inventory. Then, they might have to sell excess stock at a discount during quieter periods, which hurts profits.
During peak times, you might need to hire more staff to handle the rush, leading to higher payroll costs.
When business is booming, companies might spend more on advertising and promotions, which can strain cash flow if not managed carefully.
Pro Tip: Stay Proactive in Managing Cash Flow Through Seasons
Here are some tips to avoid common cash flow problems:
Save money when business is good so you can pay bills when business is slow.
Hire temporary staff when you're busy to save on labor costs.
Keep less inventory when things are slow to save money on storage.
Plan your budget carefully, considering how sales change throughout the year.
Give discounts to boost sales when things are slow and use marketing to attract customers when business is quiet.