Cash flow is sometimes mistaken for company revenue or income. However, it’s somewhat more complicated than that.
Simply put, cash flow refers to how much money goes through a company, including all of the proceeds and expenses. It’s a vital aspect of business that every entrepreneur needs to monitor carefully.
That’s where cash flow management comes in. Effectively tracking funds can allow you to develop a more precise plan for future investments and cover the necessary expenses.
In this article, you’ll learn how to improve your cash flow with six useful tips to help you achieve just that.
Starting from the side of revenue and profits, the first thing you should take a look at is your pricing.
Examine your prices to determine if they need re-evaluating. Whether your pricing is based on individual projects, product or service value, or determined hourly, you might need to make adjustments to account for the market changes.
Underpricing is a common mistake many businesses make, and it can hurt your profits as much as overpricing in the long run. So, research the market and form reasonable, competitive prices to ensure enough cash comes into your business.
Every business has unavoidable expenses that could be draining it of funds and disrupting the cash flow. Luckily, you can influence many of them.
The best way to keep your business expenses in check is to review them monthly and see what you could cut back. Sometimes, your company can spend unnecessary funds on services that have become obsolete or ineffective.
For example, if there’s an aspect of your marketing campaign that isn’t driving enough traffic or conversions, it may be wise to get rid of it.
Once you optimise the expenses, you’ll gain better control over where the money’s going, which could greatly benefit your business. So if you’re wondering how to improve your cash flow in the quickest time possible, limiting the expenses is one of the best ways to go about it.
Cash flow management isn’t only about resolving immediate issues, but rather a matter of careful, consistent planning. That’s why forecasting and creating projections is vital in managing cash going in and out of your business.
When you create a cash flow forecast, it will require insight into all of the predictable revenue and costs your company will make or incur in a given period. This insight alone will inform you of the overall financial state of your business, in addition to being helpful for future predictions.
Forecasting entails creating a detailed projection of the company’s cash flow, including exactly when you will receive and make payments. You’ll have more control over the financial strategy and ensure your business can achieve sustainable growth.
There is such a thing as growing too fast and it can be a serious downfall for businesses that don’t pay attention.
Growth is the ultimate goal for every company and additional costs of operations come with it. So if your business is creating revenue but rapidly expanding at the same time, it will create an imbalance in your cash flow.
Your projections will have to take the expansion into account to make sure your company can handle the growth. Ideally, it would help if you kept a cash reserve as a backup and additional support for company growth.
When looking at the overall expenses, it might seem counterintuitive to lease supplies or equipment for your business rather than buy them. But when you’re considering how to improve your cash flow, it’s important to be aware of the bigger picture.
Buying equipment could be challenging for businesses that don’t have ample amounts of available cash. On the other hand, leasing means you’ll have regular but smaller expenses, and that will reflect positively on the cash flow.
The costs could also even out through taxes, since monthly lease payments may be 100% deductible if you only use the equipment for your business.
When all of this is considered, there’s no reason not to lease. This is especially true if your cash reserves aren’t large enough to make buying equipment more viable.
Managing your accounts receivable is very important for both cash flow management and financial projections.
Whether your clients are paying in cash or not, you can employ several methods to ensure your clients pay for your product or service regularly. This will then provide you with consistent income.
First, you can offer rewards for early payments. A discount for customers that pay ahead of time will be an excellent incentive and a beneficial prospect for both parties. Earlier receipts will also reflect positively on your cash flow.
On the other hand, additional fees for late payments can serve as a good deterrent for less regular payers. It will either drive away unreliable customers or encourage on-time payments.
Another method to ensure you get paid as soon as possible is to send your invoices without delay. Everything should be done correctly on your side when it comes to transactions. Your clients should immediately get the invoice with the terms and instructions clearly explained.
Finally, if you’re dealing with clients that don’t want to pay in cash, always perform a credit check. In case they are in poor standing, you can decide on whether to sign them up or not. If you choose to proceed, you can likely expect late payments, but you can still incorporate those in your projections. You can make the payments more regular by setting up higher interest rates and late payment fees.
Efficient, smooth operations will contribute to good cash flow management. However, there are even more additional steps necessary for the healthy development of your business.
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