If you’ve got growth plans for your business, you’re going to need money to make them happen. Running out of money isn’t a situation any small business owner wants to face, which is why cash flow is critical to sustaining and growing a business. Whether you are a seasoned business owner or just launching your business, understanding the complexity of cash flow is essential. The fact is, micro or small companies, like all other businesses, should monitor their cash flows carefully and strictly with the aim of always having enough working capital to ensure business operations.
In this blog post, we’ll explore ways to improve your business’s money management and briefly look at why it’s important to maintain sustainable cash flow.
Why managing cash flow is important for small businesses
First things first, if you are running a business, your aim should be not only to survive but to be profitable and expand. But it’s more difficult for micro and SMEs to survive or grow due to a higher risk of failure. According to statistics, around 80% of small businesses survive their first year, and it’s estimated that around 50% of small businesses fail within their first five years of operation.
Cash flow is the most important part of a business, representing every single day-to-day money movement in and out. Proper cash flow management is essential for financial reporting and planning. Cash flow can indicate your company’s health and long-term performance more accurately than revenue or profit. Good financial health leads to more flexibility and maintaining competitive advantages. However, many small businesses, even profitable ones, work within slim margins with little room for large purchases or economic setbacks.
Here are some strategies on how to review and audit your company’s cash flow to increase your company’s financial health:
- Reevaluate spending
Business decisions must be based on high-quality financial data that is available in a timely manner. Poor cash flow management leads to a lack of working capital needed for day-to-day activities. The most evident consequence of poor cash flow management is a significant decline in cash, making it difficult to meet repayment obligations to banks, suppliers, or partners.
This is why carefully reviewing all income sources is so important. Cash flows come not only from sales, but also from various sources such as VAT received, sales of fixed assets, tax refunds, and loans raised. Consider all sources and prepare detailed budgets, review them monthly, and strictly follow the budget. Always review profitability and loss forecasts. Detailed management allows for better cash flow forecasts and helps predict various scenarios.
Carefully audit your expenses and income, assess your inventory, and sell unnecessary assets. Review all invoices and, if needed, negotiate with your suppliers or partners for discounts.
If you already have a loan, consider refinancing. Many financiers can offer better terms, saving your business money in the long run. Clear documentation, future forecasts and a good record of your cash flows increase your chances of negotiating better loan terms or discounts.
- Improve payment processes
Improve payment processes for your customers so you won’t need to wait for payments. Customers want a seamless experience. They are usually willing to pay on time, but it’s your task to make it easy for them. There are plenty of tools that offer digital payment solutions. Explore the market and give your customers options that make it easy to pay.
Send invoices on time. The faster your business gets paid, the more cash you’ll have to cover expenses, invest in growth, or save for future needs. Consider charging upfront or at least collecting a deposit. Offer special discounts for customers and partners who always pay on time, and implement penalties for late payments to ensure timely payments. To save time, consider investing in automation for sending invoices and reminders.
Consider raising your prices. Increasing your prices is a concept that scares many business owners. To do it successfully, analyze your customers, the cost of providing your products or services, and their value. Determine the sales margin you need to cover your expenses.
- Diversify incomes
Diversifying your income sources is safer than relying on a single customer or market. The same principle applies to suppliers. If you depend on just one supplier and there’s a sudden supply failure or a break in the commercial relationship, your business could be at risk. Diversify your product or service offerings to attract more customers and explore alternative suppliers to reduce these risks. Consider geographical expansion or offering additional services to attract different customer segments.
If you have savings, it’s important to make your company’s money work, so use high-interest savings accounts for money that’s just sitting in your accounts.
- Boost sales
Sometimes poor cash flow occurs because the business doesn’t generate enough income. In this case, consider ways to boost sales, such as adopting more aggressive sales strategies or investing more in marketing. Targeted marketing campaigns can bring in new customers and increase sales. Think about developing new online sales channels to reach a wider audience or rethinking your business strategy to start collaborations with other businesses and engage in cross-promotions.
- Borrow short to invest long
When it comes to securing working capital, a simple business loan is a popular short-term financing option. But there are other creative strategies to consider that can help boost your cash flow even more effectively.
Consider factoring. One effective method is invoice factoring. By selling your accounts receivable to an invoice factoring company, you can receive up to 90 percent of the invoice value within 24 hours of issuing it. This means you won’t have to wait 30, 60, or even 90 days for customer payments, giving you quick access to cash.
Lease, don’t buy. Leasing supplies, equipment, and real estate may initially seem illogical because it can be more expensive than buying outright. However, unless your company has cash reserves, leasing helps maintain a steady cash flow for day-to-day operations. Leasing lets you pay in smaller, manageable amounts, which improves cash flow.
By combining these strategies—leveraging short-term loans, using invoice factoring, and opting to lease rather than buy—you can effectively manage your cash flow, ensuring your business has the liquidity it needs to thrive and grow.
Thinking about financing? Explore our solutions tailored to your business needs.
A healthy cash flow is essential for every business.It helps when applying for loans or attracting investors. Good cash flow management makes you more competitive, keeps your finances stable, and lowers risks. With strong financial health, you can plan better, get better loan terms, and save money. Good cash flow also improves credit rating, which helps in getting financing, attracting investors, negotiating with suppliers, and expanding.