Cash flow is the lifeblood of any small business, and mastering it is crucial for sustainable success. Managing your cash effectively can mean the difference between thriving and struggling to stay afloat. Here are a few essential strategies to optimise your cash flow to support your business growth.
1. Understand your liquidity
Liquid assets are those that can be quickly converted into cash, such as savings, investments, and accounts receivable. To gauge your liquidity ratio, subtract your accounts payable (what you owe) from the sum of your bank balance and receivables (what you’re owed). A healthy liquidity ratio indicates that you have sufficient resources to cover immediate financial obligations. By keeping a close eye on this ratio, you can proactively address any potential cash flow challenges.
2. Control inventory wisely
For businesses that deal with physical products, inventory management is critical. Overstocking ties up cash, while understocking can lead to missed sales opportunities. Implement an efficient inventory control system that aligns with demand forecasting (top tip: having an ERP system like Cin7 Core will help you manage this easily)
It’s also good to regularly assess your inventory levels and identify slow-moving or obsolete items. Optimise reorder points and safety stock levels to match demand patterns. Consider implementing just-in-time inventory management to minimise carrying costs.
3. Manage Accounts Receivables and Payables
Striking a balance between collecting receivables and delaying payables can improve your cash flow position considerably. Encourage prompt payment from your customers while negotiating extended payment terms with suppliers where possible. Implement clear credit policies and actively follow up on overdue invoices.
Utilise invoicing software like what Xero offer to send automated reminders to customers about overdue payments and consider discounts for early payment.
4. Prepare for seasonality
Many small businesses experience seasonality, where revenue fluctuates throughout the year. Preparing for these fluctuations is vital to maintaining a healthy cash flow. During peak seasons, set aside excess income to cover expenses during slower periods.
Create a seasonal cash flow projection that identifies when you’ll experience revenue spikes and dips. Use this projection to guide your spending and saving decisions. Additionally, consider diversifying your product or service offerings to generate revenue during off-peak times.
5. Allocate funds for taxes and other overhead expenses
Taxes, rent, utilities, and team salaries are recurring costs that must be paid regularly. Neglecting to allocate a portion of your revenue for these expenses can lead to financial strain and potential penalties.
Create a separate bank account for tax and overhead funds. Consider regularly transferring a predetermined percentage of your income into this account to ensure that you have enough to cover your financial obligations when they are due.
6. Do you have an emergency fund?
Just as individuals should have an emergency savings account, small businesses should establish an emergency fund. This fund acts as a financial safety net, helping you weather unexpected challenges, such as equipment breakdowns, sudden market downturns, or even global crises like the one we faced recently. Having reserves in place provides peace of mind and ensures that your operations won’t grind to a halt when unforeseen expenses arise. It also allows you to quickly grab new opportunities that you come across that could catapult your business growth.
By staying on top of good cash flow management strategies such as these, you can ensure your business remains financially resilient and poised for success.
Our team of accountants at Iridium have a few more cash flow management tips up their sleeves, why not connect with us to learn some more? Feel free to follow us on socials to learn some more useful tips!
