Be it a start-up or an established business, managing the cash flow is essential for smooth functioning of a business. Some business owners concentrate simply on profit and please reduced emphasis on maintaining positive cash flow. Profit making is important but if the cash flow is not adequate, then the businesses will not be able to pay its operating expenses and soon fail.
If you’re struggling with your cash flow management, then here are 5 tips that can help you deal with this issue.
1) Get Early Payments
Encouraging your clients to make early payment of accounts receivables is beneficial for increasing your cash flow. Send invoices immediately after the consignment is delivered or the work is completed, offer discounts to clients who make early payments and send reminders to clients whose payment is due.
2) Pay Your Bills on Time
Late payment of bills and accounts payables not only affects your cash flow, but also creates a negative impact on your credit score. That said, some parties charge late fees for untimely payment that takes away a lot of money. The best way to avoid late payments is to give standing instructions to your bank for automatic payment of your bills.
3) Maintain a Cash Reserve
The lack of cash is the biggest risk to a business’s survival. If you’re running short on cash, then it’s time to maintain some cash reserves to cover those shortcomings. Maintain a cash reserve of about 20 percent of the revenues to deal with an unexpected insufficiency of funds.
4) Understand Your Actual Cost
Many businesses fail to understand their actual cost and what their expenses are, leading to a negative impact on the cash flow. As a result, they fail to calculate their breakeven point and determining whether they’re charging the right amount for their products and services. Monitor your expenses and learn what your actual cost is. By doing this, you’ll figure out your revenue generation amount and profit margin.
5) Avoid Offering Massive Discounts
One of the most common mistakes committed by start-ups is that they offer huge discounts to their customers to win them over. This strategy may seem reasonable, but it is very risky. Doing this may disparage your services and decrease your profit. Offer discounts only to your trusted clients and determine the amount of discount offered so that your profit is not affected.
Maintaining a positive cash flow is important to ensure the proper functioning and survival of a business. Monitor your cash flow, avoid late payments, encourage early payments, maintain a cash reserve, know your actual cost and avoid offering huge discounts. These tips are sure to help you out in managing the cash flow.