At the center of nearly every small business is its cash flow. Cash flow is the amount of money that comes into your business, how much goes out, how much is owed to you and how much you owe. It is a simple concept that can hinder small business growth when not adequately managed.
Managing cash flow can be one of the top challenges for small business owners. In fact, poor cash flow management is one of the primary reasons small businesses fail. Even if a business has a lot of money coming in (positive cash flow), mismanaging that money can lead to problems.
The experts at U.S. Bank have put together these five strategies for managing cash flow:
1. Keep control over your invoices
In most cases, you are in business to provide a product or service in exchange for payment. So while it can be hard to follow up on unpaid invoices or pressure clients to pay, doing so is essential to managing cash flow. Carefully record and track each invoice sent, payment received, and delinquent payment to assure you are not leaving money on the table, or negatively impacting your cash flow.
2. Keep cash on hand
Just like in personal finances, a business should always have a reserve (emergency) fund to cover slow periods or unexpected expenses. If possible, have enough cash on hand to cover three to six months of expenses, and to help ensure that you never fail to cover important costs like payroll or inventory.
3. Speaking of inventory, don’t overdo it
With many manufacturers and material providers offering discounts for buying in bulk, it can be tempting to order an excess of inventory in exchange for savings. But idle, or worse, expired, inventory comes with costs, and those must be weighed against the savings. When possible, keep only enough inventory on hand to meet your customers’ needs.
4. Be careful with credit
This is two-fold: You should be careful of borrowing too much credit or extending credit to your customers. When borrowing to cover costs of equipment or inventory, you want to be mindful of payments and interest and make sure you can handle the terms of your loans. Or, if you allow customers to pay over time, have a credit approval process in place to make sure your clients will be able to pay.
5. Keep costs under control
When a business is healthy and making money, it can be tempting to spend that profit. Instead, consider what you are spending and whether it improves the health of the business. For instance, a piece of equipment to replace a malfunctioning unit may lead to greater productivity, while a top-of-the-line espresso machine for the break room may not (though there can be benefits to increasing employee morale). If you need a place to stash extra cash, consider your reserve fund (see tip #2).
By understanding how to manage cash flow, you will be better able to manage the ups and downs of your business, and keep your business healthy and strong. Talk to a business banker at U.S. Bank who can help you sharpen your cash management skills, or visit usbank.com/business for more information.
Editor's note: This article was written by our partners at U.S. Bank.
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