It is expected to encounter various complications when starting a business. One of them may be keeping your finances in order. This guide gives you the keys necessary to maintain a stable and healthy cash flow while your company is running.
Learn to calculate and project the cash flow of your business
If you want to take your company to the next level of growth, it is essential that you know the cash inflows and outflows that you have and will have in the medium term. Otherwise, it will be tough for you to recognize your ability to face debts and protect your business.
Calculating cash flow helps to understand what actually comes in and out of businesses, such as sales receipts, bill payments, or expenses, and, in this way, quickly determines companies’ liquidity.
It should be noted that these numbers do not show the profits or losses of companies, as they are not related to their income statement, but rather allow them to make decisions such as:
- When to purchase merchandise.
- How do you buy and collect it in cash or through credit?
- Pay debts on their due date or through refinancing.
- Find out if surpluses can be invested in new investments.
This last point is precisely what you should pay the most attention to. Part of these balances can be invested, for example, in the capital market, which would generate income in addition to the business itself.
Learn to project your cash flow.
Suppose you want to have enough control over your business to anticipate future deficits or cash shortages, be able to apply for loans, factor accounts receivable and even invest in the capital market. In that case, you should think about projecting your cash flow.
To do this, you will have to estimate your sales for the following months and the entire time period you want to project, considering that some sales are paid in cash while others are financed over 30, 60, or more days.
In addition, it is essential to record the income after you receive it. That is why you should have the accounts receivable on hand beforehand, as well as the purchase of supplies you will make monthly during this period.
Remember to take into account the loan disbursements expected from banks (including the monthly installments), administrative costs, salary payments, taxes, and other expenses.
How to manage cash flow in a medium-sized company?
One of the main reasons a medium-sized company fails is poor internal management of incoming and outgoing money.
When you lack the proper knowledge, it is very easy to make mistakes, which is why it is essential to understand and apply proper cash flow operations.
What is cash flow?
In simple words, cash flow is a financial report on the movement of cash within your company that can be measured over a week, a month, or a quarter. Cash flow helps to determine a business’s liquidity and avoid financial problems.
A company can experience two types of cash flow: positive cash flow, which means that the sum of money coming in is greater than the sum of money going out, and negative cash flow.
On the other hand, negative cash flow occurs when the money going out is greater than the money coming in. If not regulated, this could lead to several problems. Poor cash flow management is the cause of 82% of business failures.
Just because a business is experiencing cash flow problems doesn’t necessarily mean it should focus only on selling more.
Several factors can help you organize and avoid potential problems with your cash flow.
Identify and categorize your expenses.
The first and most important thing is to be fully aware of your spending. Categorize by section (administrative expenses, sales, marketing, research, production costs and operations) and identify if there are any that stand out. This way, you will have a clearer view of the distribution of money.
Minimize spending
“Money to make money.” While the phrase has some truth, it also has a catch. By letting themselves be carried away by this thought, many entrepreneurs fail miserably when making a considerable investment, especially in the first months of the business. It is always essential, especially when starting, to consider the cost-benefit of each peso spent.
Classic mistakes made in the management of a medium-sized company
Overestimating future sales
This is one of the main mistakes entrepreneurs make. A business will always need a leader who is enthusiastic but aware, realistic and objective in his predictions.
It is important to understand that not everyone interested in the product will become a buyer and that although there are times when sales increase, that does not mean they will cover the expenses.
To keep clean and secure accounts, it is essential to work with real numbers and historical evidence of the company (or a similar one in the case of a very young company that does not have such data).
Basing your sales expectations on facts will help you maintain a steady flow and avoid overspending.
Don’t worry about customer payments.
Not maintaining order in debt collection management is another worrying mistake in the life of a medium-sized company and a sure path to a cash flow crisis.
Unfortunately, SMEs do not have established collection policies, unlike larger companies. This often means that customers do not bother to pay on time, generating a cash flow gap that will surely have serious consequences.
This is why, if you haven’t already, you should establish payment policies with your clients. For example, you can implement small discounts for those who pay on time and interest for those who pay late.
Not working according to the budget you made
Getting your customers to pay and projecting sales realistically will be useless if you do not properly organize your budget.
If you don’t have a well-organized budget and unstable cash flow, paying your suppliers will likely be a problem.
An orderly cash flow will help you keep track of income and expenses over a given period. This lets you anticipate low sales periods and determine when to reduce costs.
How to maintain a healthy cash flow in a medium-sized company
Categorizing your income and expenses will help you have a clearer vision of what things generate more profits and expenses and what areas you can cut back on in times of crisis.
On the other hand, it is very important to keep personal expenses separate from those of the company. When a small business owner starts using cash to pay bills that do not correspond to the company, the company’s financial health will be dramatically damaged.
Thanks to digital advances, a good option to keep your cash flow in order is to have management software.
A wide variety of programs are on the market, including some that are free. Find the one that best suits your business needs and apply it.
How to improve cash flow when your business is growing
Cash flow is characterized by reporting what comes in and out of the business, such as sales revenue and/or bill payments.
Its importance lies in letting us quickly know the company’s liquidity, giving us critical information that helps us make better decisions.
However, you will need more money to maintain growth as your business develops. As revenue increases, so will your costs, and the profits from your first sales may not be enough to fund this initial evolution.
Building brand awareness and sales volume takes an average of 6 months, so you’ll need capital before seeing sales revenue.
In this first stage of growth, it is essential to have an orderly and methodical control of your cash flow.
A 2017 Fifth Third Bank survey of 505 privately held organizations with less than $10 million in revenue found that 32 per cent of business owners consider lack of funding a top obstacle to business growth.
This means that if you are growing but are not managing cash flow effectively, your business may not be able to operate, much less prosper over time.
3 ways to get liquidity and generate higher profits
Thinking about improving cash flow while growing your business is one of the biggest concerns for business owners and managers just starting. The good news is that even though your business may be proliferating, it is possible to improve cash flow.
Traditionally, financing has been the primary alternative for many entrepreneurs. Today, however, capital can be obtained through new investors, lines of credit, crowdfunding, or accounts receivable factoring.
But if you’ve already tried one or more of those strategies and you’re still seeing unstable cash flow, the following tips can be of great help:
1. Talk to your creditors: While turning to factoring is an excellent alternative to obtaining immediate financing, few managers and entrepreneurs consider another option: talking sincerely with your debtors.
It makes sense. If you are owed money, you will have problems with your cash flow, and therefore, you will probably also owe money to your suppliers or have unpaid company bills.
Typically, when new businesses double their revenues, their costs double, but the time to manage the workload remains the same. The situation becomes more complex when customers move from 30-day payment terms to 60-day and 90-day terms.
To reverse this and get your cash flow in order, a helpful option is to talk to your suppliers or whoever you owe money to to see if it’s possible to pay them when you get paid. This exemplifies how communication is essential to maintaining strong supplier relationships.
2. Adjust your prices: If time has passed and you are still experiencing cash flow problems, your product or service’s prices are likely too low and unprofitable.
If you’re spending a lot on salaries, rent, advertising, or infrastructure but are still getting little money, you should evaluate whether the price you’re charging is correct.
Something similar happened to Bradley Shaw, owner of SEO Brad in Addison, Texas, a company founded in 1997. “With all the commitments, it’s unsurprising that we’ve had some cash flow issues.” To counter that, Shaw raised his prices by 25%.
Making that decision was not so simple. “Marketing is very competitive, as many foreign companies bombard customers with unrealistically low prices and false promises. This was a concern before we decided to raise our prices,” says Shaw.
The good thing in this case is that the company had not raised its prices in years and knew that its customers were getting a high return on investment from their business.
“25% wasn’t a huge increase for our customers,” he says. But for his business, “it helped our cash flow. Looking back, I wish we had done it sooner, as the additional revenue has allowed us to grow and provide even better service to our customers.”
If you decide to increase prices, you can offer your customers a deal or a royalty so they don’t receive the news so abruptly. Shaw, for example, offered a 10% discount for prepaid contracts instead of monthly payments. This offer helped accelerate cash flow even further.
3. Check that the problem is not with cash flow: perhaps the problem is not with what comes in and out of your business but with other external factors, such as not accurately forecasting how the market is expected to change in the coming months or even taking too long to sign contracts with new clients.
Performing cash flow calculations regularly is another good practice. If you do it continuously, you can see, for example, if negative balances are concentrated on a particular day of the week. In this way, you will have more excellent knowledge of the movements and behaviour of cash, making it easier to find a solution in the following periods.
Reviewing the cash flow operational cycle at least once a month is also advisable, as well as updating the values and provisions.
Bonus: Don’t trust yourself
When recording your business income, avoid taking into account checks and promises of payment since these are money that does not yet physically exist, and it is preferable to think that it is not there rather than assuming that you already have it.
In these cases, the best approach is to prepare two separate reports of actual and future income and include the latter in the cash flow when it is proven that the money actually came in.
