Cash flow plays a crucial role in the day-to-day running of your business operations. It can mean the difference between succeeding and shutting your doors for good.
Still, many small business owners don’t truly understand the importance of cash flow and how poor management can damage their business. Let’s take a closer look at the importance of cash flow management.
What Is Cash Flow Management?
Cash flow management is the process of tracking and managing the cash that is coming into and going out of your business.
Proper cash flow management will give you a clear picture of your revenue and expenses and also ensure that you have enough cash to cover your bills while still turning a profit.
With proper management, you can predict how much money your business will have in the future, allowing you to make smarter decisions.
Poor cash flow, however, can have a negative effect on your business.
How Poor Cash Flow Can Damage Your Business
Cash flow management can make or break a business. When properly managed, it can help a business grow and thrive. On the other hand, improper cash flow management can damage your business.
Poor cash flow can:
Hurt Business Relationships
When your business is strapped for cash, you may be unable to pay your suppliers. Over time, this can damage your business relationships and your brand’s reputation.
The damage to your reputation can have long-term effects. Even if you recover and find ways to better manage your cash flow, word may spread about your inability to pay in the past. As a result, vendors and suppliers may not trust your business or be willing to take the risk of not getting paid.
If your cash flow is poor and you cannot pay your suppliers, you may also find it harder to meet contractual obligations and deadlines.
Hurt Your Business Credit Score
When you have poor cash flow management for business, it may mean that you cannot make debt payments on time – or at all. Consecutive late payments or defaulting on a loan will impact your business credit score.
A poor credit score will make it harder to get loans, lines of credit or credit cards in the future. Even if you can secure credit, the interest rate may be higher because your business will be considered high-risk.
Hinder Your Growth
If your cash flow is poor, your business may struggle to buy new inventory or expand operations.
Without new inventory, you may not be able to keep your operations going.
Leave You Without Staff
Your employees are the backbone of your business. Without them, you will struggle to keep operations running smoothly and meet deadlines.
Poor cash flow may mean that your business doesn’t have the funds to pay your staff. You risk losing your team and further hurting your reputation. Job seekers may think twice about applying for a position at your company if you struggle to pay your staff.
The Three ‘Pillars’ Of Cash Flow Management
Cash flow management ultimately comes down to three important things: how much cash you’re generating, how much you’re actually being paid and your expenses. When building a cash flow management strategy, these three pillars will be the foundation of your plan.
Revenue
One of the most important factors in cash flow management is revenue. How much money is your business bringing in? Even if you can scale down your expenses, your business will still struggle to stay operational if you aren’t generating enough revenue.
To generate more revenue, focus on:
- Improving customer loyalty. Businesses with loyal repeat customers can more accurately forecast their cash flow.
- Improving the quality of your product or service.
- Being strategic about promotions and the pricing of your offerings.
Payments
On paper, your business may be generating revenue, but how much of that is actually reaching your bank account? For accurate cash flow forecasting, it’s crucial to ensure that your business is being paid in a timely manner.
- Send invoices promptly.
- Enforce late payment penalties.
Expenses
For proper cash flow management, you need to have a thorough understanding of your expenses. To maximize cash flow, consider ways to reduce your spending, such as:
- Negotiating the cost of rent and supplies.
- Comparison shop to find the best rates for everyday supplies.
When learning how to improve cash flow management, these three pillars will give you a complete picture of your cash flow. With proper cash flow management, you can make smarter business decisions and ensure that your business has enough cash to keep its doors open now and in the future.
