4 Best Practices To Stay Cash Flow Positive
If you own a business and your sales are increasing at an accelerated pace, you’re probably on the right track. But this doesn’t mean that you should put your guard down. Even if your business is growing, it can still face cash flow issues if your finance, operating, or investing plans are not running efficiently. Keeping a healthy cash flow is key to long-term success for any business. This is especially important for smaller businesses, as studies have shown that 82% of small businesses fail because of poor cash flow management or a poor understanding of cash flow.
Staying cash flow positive means that your business has enough money coming in from sales, investments, and other sources to cover all of its expenses. It also helps you stay on top of debt payments and avoid costly late fees or penalties.
The article below will help you navigate through the difficult moments of a business expansion by highlighting four best practices for positive cash flow management that all business owners should be familiar with.
Plan For The Future
Accounting records that are accurate, timely, and relevant allow you to forecast your business’s future based on past results. Businesses should at least review their cash flow every month. A critical tool for anyone looking to understand their financial position and plan for the future is a cash flow statement, as it shows how much money is coming in and out of your business over a certain period of time.
By understanding this statement, you can make informed decisions about where to invest your money and how to manage your cash flow. With the right strategies, you can ensure that you have a positive cash flow and create a more stable financial future for yourself. Being proactive about your cash flow allows you to plan for difficult periods in the past or seasonal trends.
If you anticipate a future need for extra cash, it may be worth talking to lenders to see if a loan can pave the way for future financing. If you anticipate big expenses before the payout, you will be able to make strategic financial decisions to avoid negative cash flow.
Enhanced Inventory Control
Inventory control can improve cash flow. Cash outlays for inventory purchases can affect the cash flow statement of a company. Overstocked inventory will show up as a negative expense on the cash flow statement. This is the reason why your company’s cash flow is heavily dependent on the way you manage your inventory.
Inventory planners are a great way to measure how effectively you manage your inventory stock and how much of it is bought and sold during the financial year. Inventory control metrics allow you to respond to the market and meet high demand.
The higher your inventory turnover rate, the better your cash flow. If this ratio is low, it means that you are purchasing inventory more quickly than you’re able to sell it. Improving the inventory turnover ratio will help you reduce cash flow.
Improve Your Accounts Receivable
You can reduce the amount of time that it takes for you to be paid by managing your accounts payable process accordingly. You can encourage customers to pay earlier. Consider offering a small discount to customers who pay within 10 days of your net 30-day payment terms.
If, for instance, you’re waiting for checks to arrive, you can make it easier for your customers to pay you by offering a range of options, including ACH and credit card payments.
These options come with fees, but if your cash flow is tight, you will benefit from getting paid faster and reducing the time and labor required for collection. These options will help you avoid accumulating credit card debt in order to cover expenses.
Avoid Big Expenses
Expenses can occur at any time, and they can pose a problem when you are launching or expanding your business. You may invest in items you don’t need. For this reason, perform a critical evaluation of the purchase if you don’t have enough cash inflow to cover your expenses.
When you generate a large amount of revenue, your plans for future growth can come true. Customers may not consider what you offer when they buy your products or services. Instead, they might look at how well you present and sell them. No matter how well you manage your costs, not having additional cash flow can hurt your business. One of the easiest ways to manage your cash flow is to increase revenue and decrease expenses.
Final Thoughts
Cash flow management can be a complex topic. However, by managing client relationships, creating a cash flow budget, controlling your inventory, and avoiding large expenses, we are sure that you will be able to navigate through the rough waters of business and keep your cash flow positive.
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