Most people starting a small business don’t have a huge amount of experience with financial lingo. Sitting down with a bank manager or business coach, it can be overwhelming to know your overheads from your off-balance sheet!
Whilst you’ll learn your way around the world of small business finance pretty quickly, there are some concepts that you will need to have a strong grasp on before you begin. And one of the most important financial concepts you can understand is cash flow.
This article will walk you through a basic understanding of business cash flow, why it’s important, and ways you can keep it under control.
What is cash flow?
Simply put, cash flow is the movement of money in and out of your business. You receive money for goods or services, and you spend money on the upkeep of your business – that can be amenities, rent, equipment, staff wages, land, or bills.
From an accounting perspective, your cash flow is either in the negative or the positive when reviewing a specific period. If it’s in the positive, it means you have more money coming in than you have going out – and visa versa if it’s in the negative.
Why is it important?
Cash flow is a balancing act. The balance is to ensure optimal timing between receiving payment, and making payment. In your first few years of business, you will be working overtime to make sure you have clients on a payment schedule that works with the timing of your regular expenses such as rent, or bills. Easier said than done!
If you have poor cash flow, it means that the money coming into your business is either too small, or too slow. If this is the case, your own expenses will begin to build, and you may find yourself in debt waiting for cash to become available.
Conversely, good cash flow allows you to make not just on time, but early payments – which will stand you in good stead with suppliers.
How can I improve my business’ cash flow?
A fast answer to this question is easy: make more, and spend less! But there is much more to achieving a good cash flow system in your business, and much of it simply comes down to good planning and good communication with your clients.
Here are some of the best ways you can begin to manage your cash flow.
1.Plan and track your finances in detail
Whether you have a full time accounts manager or are balancing your books personally, make sure that you have detailed tracking of your sales and expenses. This will help to identify trends such as your best-selling goods or services, or to locate expenses that are increasing.
Always make sure you separate out your personal expenses from the business expenses. Looking at your bank balance won’t always tell the full story: breaking down how much money your business requires will allow you to make more accurate decisions.
This means including ALL costs. Everything from your business travel expenses, to the coffee in your workshop or office space, add up to create the whole picture of your business’ cost.
2. Amplify your incoming cash with a high-demand offering.
Looking at your sales details will cast a light over your incoming cash. What’s making you the most money, with the least output? These are the goods or services that you must focus on. Similarly, what are the sales that are making you the least amount of money, with the greatest output?
Some services that you always considered to be part of your base offering might be chewing up valuable cash with expensive machinery or large crews. How can you balance these jobs through the month to ensure that you have a plentiful cash flow come billing time?
3. Constantly review your expenses.
For small businesses concerned with their cash flow, the common approach is to put their heads down and charge full steam ahead in order to increase their profits. But it is just as important to pause regularly to review your expenses and ensure that you are not leaking money unnecessarily.
When looking at your expenses, ask yourself these questions: what is costing you the most? Are these expenses necessary? Can you reduce any initial expenses, without reducing the quality of your offering?
Other methods to control your cash flow.
These days, there are a number of financial products and services that sit outside your traditional financial lenders that are designed to improve cash flow for small business.
One of these companies is GoGetta. By providing upfront finance for vehicles or equipment, it means you can get started on bringing in the profits, and pay it back once you’re on your feet.
GoGetta is a great way to free up cash flow, as you are not making that big initial outlay on equipment. For more information, check out our finance comparison guide below.