Cash flow refers to money put into a business and sent out. Cash flow is essentially the movement of funds. When a business receives money, they want to spend it on optimizing its cash flow better. Optimization of cash flow comes from actively making income from these avenues.
What Increases and Decreases Cash Flow in a Small Business?
Do you know how to increase cash flow in a company? Cash flow does not refer to just profits. It's tied to excess funds and expenses. When net income decreases, so does cash flow.
Businesses must first pay their liabilities and expenses such as debt, employees, and administration costs. The excess wealth left can improve the business by investing in better equipment to speed up production, generate more revenue through new projects, or put into a savings account to generate interest and be used for emergencies.
Knowing your finances will help you with the ins and outs of the financials of your business.
How to Monitor Cash Flow in a Business
The best way to monitor cash flow is by using 3rd party financial services or using the systems and features banks have for you. Checking your balance sheet is a sure way of knowing what affects your cash flow has on your business.
Why Increase Cash Flow for Your Small Business
Increasing cash flow is vital for your business because having idle money is not a good thing. You're essentially losing even more money when cash isn't moving and just sitting around. Even putting your money in a savings account is good because it generates interest over time.
Money generates more money. Money sitting in a checking account acts as idle cash until a transaction. Remember that the best ways to improve cash flow in a business use your money to its fullest potential.
Tips on How to Increase Cash Flow for Your Small Business
Small businesses should understand how to improve cash flow and optimize it properly.
Adjust Prices of Goods and Services Offered
Typical cash flow management practices in small businesses involve price changing. Prices must increase as demand rises and materials for products become expensive. Price increasing is essential, but doing it wrong will leave your business in a worse state.
If your business is still offering the same amount for a product even though now that product costs more to make, you're effectively losing money. Consumers are typically aware that extra expenses pass onto them as the cost of making things increases.
Lease and Software
Equipment is costly. Initial costs for purchases such as equipment are massive, and software and software upgrades add up. If your business can save costs by leasing equipment, you may be in a favorable spot.
Leasing equipment and software allows your business to receive upgrades for no additional start-up costs.
Digital and Automated Invoices
The use of digital invoices has become popular for multiple reasons. Your business receives payments faster than traditional methods, and the consumer is aware of their cost promptly. The consumer being aware of their total costs is important because it helps them plan and adjust for payment properly.
Having digital invoices also allows the business to track revenue with little to no error properly.
Use Idle Money
A fundamental concept in business is that you have to spend money to make money. Idle cash isn't generating any revenue, but it does have the potential to multiply. Ensuring you invest your business's excess income is the best way a small business can grow and increase cash flow.
There are hidden secrets in small business bookkeeping that are a sure way to save money and increase cash flow. Paying an accountant is always a viable option, but accounting software allows even the most amateur business owners to understand how to manage their funds properly.
Accounting software enables you to track all of your business's finances straight from your computer and phone. Most accounting software also tracks invoices, employee payments, and savings.
Outsourcing allows your business to save costs on R&D, new equipment, and other added expenses when dealing with a project that requires resources you don't have.
Communication barriers and other problems can arise, but outsourcing is a fantastic way to constantly keep your options open to tackle new projects and make more money.
Business Line of Credit
Having a business line of credit will prove valuable on many fronts, primarily emergencies, and cover expenses for the months. Small businesses have volatile income, so there may be times when they need to draw upon a different fountain of cash while waiting for payment from unpaid invoices.
Having a business line of credit is similar to any form of credit as it acts as a constant source of adjustable cash.
An alternative to a business line of credit would be a merchant cash advance, but how does a merchant cash advance work? Basically, a merchant cash advance allows a business to quickly access additional funds via a loan.
Banks will typically offer a service to automatically transfer income from your business checking account into a business saving account. An added benefit to sweep accounts is that the bank will automatically transfer money to cover the costs if your checking account dips below a threshold.
Refinance Business Loans
Small businesses typically suffer by paying higher interest rates on small business loans. As they become an established business, they open up lower interest rate loans because they now have more credibility. If you have certain business loans with a high-interest rate, it may be good to refinance those loans.
Best Cash Flow Management Practices in Small Business
Cash flow practices will typically involve improved awareness of where your money is going and why it's going there. Common practice is to keep track of money by having a close relationship with your finances.
Tracking your money and seeing how much you're generating through your excess cash is one of the best cash flow management practices. Small businesses have the opportunity to be closer with their money and use it wisely.
About the Author, James Webster
James Webster, founder and CEO of ROK Financial has almost two decades of experience within the financial services industry. His passion for helping small business owners and his innovative way of thinking, has allowed him to run multiple successful businesses including National Business Capital & Services. Under the National name, the team was able to help secure over $1 Billion in financing for small businesses nationwide.