As a small business owner, one of the key focus areas that determines your success is effective cash management. In fact, the interest rate and loan amounts from banks and lending institutions are primarily based on how well your business is able to manage cash.
If you are floating money and creating bad debt other businesses know about it. Managing cash is not just about perennial success. Having a healthy cash balance in your balance sheet will also help demonstrate effective management to potential investors by helping secure a better valuation of your business. … no one wants to buy an unstable company.
Here are a few tips for better cash management.
1. Track cash flow monthly.
Use a budget to track anticipated cash inflows and outflows so you can assess your situation and react to problems such as the loss of a key sale. Cash flow forecasts and variance analysis against actual should be performed monthly in order to identify improvement opportunities. This frequent monitoring allows you to delay discretionary payments if necessary.
2. Protect capital expenditure.
It is important to preserve the cash that your business generates. One way to do this is by slashing your capital expenditure. While you’re in a growth phase, slashing capital expenditure may not always be feasible. However, you should perform your due diligence on expenses and ensure they are backed by a thorough return on investment (ROI) analysis.
If cash is tight don’t pay cash for long term investments in equipment. It is better to use debt or leasing to finance these projects. Debt can be used to re-finance fixed assets to free up capital.
3. Build in a culture of cash consciousness.
This is especially important if you have separate teams handling sales and finances. Typically the sales team would consider cash management to be the responsibility of the finance team and would offer liberal credit terms in the hope of increasing sales numbers to make quota or get that bonus.
One way to overcome this hurdle is to incentivize cash conscious behavior. Instead of sales incentives based on sales figures, you can offer sales incentives based on collections. This will ensure that your sales team focuses on not just achieving the numbers, but in the quality of sales.
4. Be aware of incentives.
No matter which part of the world you are operating in, there are typically a lot of incentives available for small businesses operating in specific industries.
Take time to research available incentives at a federal, provincial or municipal level. Some of the programs may help improve your company’s cash flow and profit margins.
Ultimately, where cash flow becomes an issue is when small business is operated like “small business.” You can’t arbitrarily spend money on things that may be working or go months without analyzing your expenditures.
Being your own boss is great but there’s much to learn from “big business” management.
I hope these ideas help. Please let me know: firstname.lastname@example.org