What is Cash Flow and How can SMEs Improve Theirs?
As the proud owner of a start up, your number one priority should be maintaining a healthy cash flow. Now, we know – you are stretched thin and everything feels like it is your top priority, but trust us on this one.
While filing away your receipts meticulously might not seem like the most important thing to do, getting your finances in order during these early stages are vital.
This will help make your life easier in the long run – future you will thank you! Here are our tips on helping small business owners improve their cash flow.
What is cash flow?
Simply put, it is exactly what it says on the tin – cash flow is the money that ‘flows’ in and out of your business. There are a lot of figures that come into play in your cash flow, including finance repayments, accounts receivable, inventory, accounts payable, and capital expenditures.
Cash flow is also all about timing – when you send an invoice to a client, that money is going to appear as revenue in your ‘profits and losses.’ However, until that money is actually in your hands, it’s creating a negative.
So, why is cash flow important to start ups and SMEs?
As a small to medium sized business owner, it is crucial that you always keep a keen eye on your cash flow. Why is this? Well, if you do not have healthy cash flow, you will not have the money coming in that you need in order to further invest in your business.
This might mean that you can’t put together an important proposal, buy much-needed supplies, or hire new staff. All of this leaves you sitting in limbo, stagnating without growth.
How can a small business manage its cash flow?
You’ve got to get your cash flow under your control to prevent negative surprises and falling afoul of the law. In order to do this, you need to keep track of everything that goes in and out on a weekly, monthly, quarterly and annually basis.
We’re quite partial to our Pandle cloud based accounting software precisely because it has been designed for start-ups, freelancers and SMEs, but whatever system you use, make sure you are diligent!
How can an SME improve its cash flow?
After all of this talk about cash flow, you are probably wondering how you can increase yours! We don’t blame you. Try these tips.
- Cut your costs
Ok, this one seems a little obvious, but it bears repeating with every breath. Look for better rates on your utilities, lower rents for your premises, better deals with your suppliers – whatever you can do to pinch pennies here and there.
- Send out your invoices promptly
As much as you might trust your clients, you should never delay when it comes to issuing your invoices. The faster you invoice, the faster you get the money into your account. Don’t put this off until tomorrow – invoice today.
- Consider discounts for prompt payers
Want a way to encourage your clients to pay as soon as possible? Give them a small discount and get that cash in your account.4. Ask for deposits, or send your invoice in stages
Working on a large project? It can be a good idea to ask for the payment in stages, or ask for a sizable deposit. That leaves money in your accounts while you are completing the work.
- If appropriate, don’t pay your suppliers too soon
You never want to pay your suppliers late (after all, do unto others…) but if you can wangle some wiggle room, don’t pay them too soon. Your capital can work for you while it remains in your accounts.