As a business owner, you know running a business is no easy task. We hear you! From hitting sales targets to finding new clients and keeping on top of your marketing, it can often feel like your to-do list is endless. A key component that often gets overlooked in the ordered chaos of running a business is cash flow management. If your business is doing it well, you’ll hardly give it a second thought. But without the right processes in place, poor cash flow management can cause serious problems for your business and even render your business insolvent.
According to research conducted by QuickBooks in 2019, eight out of 10 small business owners were concerned that poor cash flow would affect their future business growth. And a study in the US found that 82% of small businesses fail due to cash flow – either through a lack of understanding or a lack of skills in this area.
We have pieced together a refresher to help you understand cash flow and tips to make yours thrive.
If you’re new to the concept of cash flow, you may want to revisit our beginners’ guide to business cash flow.
What is cash flow management?
Cash flow management is the process of tracking money flowing in and out of your business over a period of time, such as monthly, quarterly, or even yearly.
- Cash comes in from sales revenue, rental income, or interest earned on savings. If your clients don’t pay at the time they purchase or hire your services, your cash flow then comes from collections of accounts receivable.
- Cash goes out when paying expenses, staff wages, loan repayments, insurance, and other accounts payable.
Good cash flow management helps you spot trends, prepare for the future, foresee and fix any problems.
What are the implications of poor cash flow management for your business?
Poor cash flow management is bad news. The less in control of your finances you are, the more precarious your business health. Without a clear view of your income and expenses, it’s extremely difficult to plan for the future and it can often feel as if you’re up a creek without a paddle.
In the short term, poor cash flow management can hamper your ability to buy new stock or make repayments. It can also mean that you are unable to pay suppliers on time, resulting in lost contracts.
In the longer term, poor cash flow management could damage your credit rating and undermine confidence in your business, depriving you of investment opportunities.
What’s more, poor cash flow management isn’t just bad for your business as it has the power to damage entire business ecosystems and affects the wider economy.
So, what can you do to improve your cash flow management?
1. Track your cash flow
Set up a simple spreadsheet to record all the money that comes in and out of your business. If you have a lot of transactions, this can be a bit of a tedious task, so be sure to set a recurring slot in your calendar to do it. Depending on your business, you may want to do this weekly, monthly, or quarterly.
2. Reconcile payments methodically
Methodical payment reconciliation involves checking your invoices and expenses manually against your financial statements, ensuring that there are no gaps in payments. Then, if you do find discrepancies or lags in payments, you can resolve them.
3. Don’t overspend
Assess your income and expenses carefully. Are you spending more than you can afford? Are you cutting it a bit fine? When it comes to cash flow management, it’s better to stay on the safe side. You don’t want to find yourself missing payroll or having to delay payments to other companies.
These sound fine, but is there a more comprehensive solution?
While these are just a few of the ways in which you can fix cash flow management, they all take valuable time when done manually… time that could be better spent driving your business forward rather than getting bogged down in admin. What’s more, any admin done manually is subject to human error. How can you ensure you haven’t forgotten to record an outgoing payment on your spreadsheet, or haven’t overlooked a payment?
Enter smart cashflow solutions, which automate your cash flow management. Open banking platforms like Juno link in with your existing bank accounts, and show you the money flowing in and out of your business bank accounts in real-time, offering automatic data crunching and insights.