Small businesses need a steady and positive cash flow to not just survive, but also to thrive in their industries. Unstable and negative cash flow may limit your financial capability to pay short-term liabilities and long-term ones. This may be the cause of your company’s problems or possible closure.
Here’s how to manage your small business’ cash flow and the factors that affect it.
Accounts receivables are not yet considered as cash until a customer pays the balance. One of the problems that small businesses encounter is when they fail to collect receivables on time. This creates another problem which is a lack of funds for regular operations and payment of immediate dues. Late payments lead to penalties that reduce profit. Manage your receivables so that you have enough cash to keep your cash flow positive.
If you don’t have enough working capital, you’ll end up borrowing too many times and you’ll likely be late in releasing salaries and payments. Loans accumulate and may limit the options of your small business. This may make it difficult to invest money in growth and product development. Keep working capital at a level that addresses your short-term needs by managing receivables and payables, and allocating resources effectively.
Inventory can have a negative effect on your cash flow, if you store too many products too long. Merchandise in your store, warehouse or office ties up cash and prevents it from circulating into your small business. Avoid storing products too long by offering discounts and bulk purchases at a lower cost.
Repayment of Payables
The way you manage your accounts payables will have a positive or negative effect on your cash flow. Late payments incur penalties that’s why you should pay your dues on time. Negotiate the credit terms and length so that you have enough cash for regular operations. Find a balance between collecting accounts receivables and paying accounts payables to keep your cash flow positive.
Implementation of Policies
Create a credit policy that provides a win-win situation for both you and your customers. Extend credit to a customer that you know can pay on time. Establish the length of the due date and possible penalties for overdue payments. Make sure to implement these consistently so that customers know what to expect when dealing with your company.
These tips on how to manage your small business’ cash flow allow you to have enough money to balance short-term and long-term financial needs. If you need to update your books, don’t hesitate to contact us here at Robookkeeper.