What is cash flow?
Cash flow refers to the movement of money in and out of your business over a specific period of time. It includes all of the money you take in from things like sales and investments, as well as all of the money that flows out for bills, raw materials, payroll, etc. Positive cash flow means that you have more money coming into your business than you have leaving it. This means that you are able to pay for your bills and other expenses. Negative cash flow means you do not have enough cash to cover all of your payments.It is important to understand your business’s cash flow. According to SCORE, the number one reason small businesses fail is due to cash flow issues. Even if poor cash flow doesn’t cause your business to fail, it can prevent you from being able to take advantage of opportunities to grow your business.
For example, let’s say you run a food manufacturing business making artisan salsa. A regional grocery store chain wants to order 5,000 jars of your salsa to feature in their stores. This is a big order, and you will make a lot of money, but the grocery chain won’t pay you for the order until 90 days after it is delivered.
You’ll need to purchase extra ingredients, packaging, and shipping, as well as pay your employees to make the salsa. The entire process could take a few weeks.
This is a great opportunity for your business to grow and for you to get salsa to new customers. However, you realize that you don’t have enough money to pay for the ingredients, packaging, and shipping you’ll need and pay your employees while you wait for the payment. You have to say no to the opportunity because you aren’t making enough money to cover all the expenses.
A different business owner might go ahead and take the order without thinking it through. After paying for ingredients, packaging, shipping, and employee wages the business is out of money and must wait to receive payment from the grocery chain. Meanwhile, it can’t continue to produce more salsa because it has no money to buy the supplies and pay employees to make it. Regular operating costs and bills are piling up, but there is no cash to pay for them. The business may be forced to close before the payment arrives.
Strategies for Managing Cash Flow
There are many tools and strategies to help you manage your business’s cash flow to ensure you have enough money to pay your expenses. Creating a budget is a crucial first step, to understanding your monthly income and expenses and begin to project what you expect to earn and spend in the future. Figuring out ways to get paid more quickly and delaying when you have to pay others can help. Having access to cash in savings or through a loan can also help you get through challenging times. The strategies and tools below can help you optimize cash flow and prepare for growth.1. Prioritize Cash Flow Over Profits
It might seem strange to prioritize anything over profits, but there’s a good reason. If you have a slow month or quarter and haven’t been keeping an eye on your cash flow, you may not have enough cash on hand to pay your bills. If you’re low on cash, you may not be able to buy materials to complete your next order or project.Keeping up with your bookkeeping can help you understand your cash flow situation and make better decisions. You should regularly review and update your records to ensure that you are on track to meet your goals and that you will have enough cash to pay for expenses.
It is also a good idea to build up an emergency fund to cover unexpected expenses or shortfalls. Your emergency fund shouldn’t just sit in your regular account though. You can put extra funds to work using a sweep account, which automatically transfers surplus funds into an interest-earning account at the close of each business day. A sweep account helps you maximize the earning potential of idle funds by capitalizing on the immediate availability of higher-interest accounts. Funds sweep back to your operating account to cover pending ACH debits and checks, so that you know you’re covered.
2. Getting Cash In
Having customers who are slow to pay can really hurt your cash flow, especially if you’ve spent money on materials for their job. The sooner you get paid, the sooner you can cover your expenses with that cash. Look for ways to improve the way you collect money from your customers and speed up payments.- Shorten the payment terms. For example, instead of giving customers 60 days to pay, you can give them 30 days to pay and get your money faster.
- Offer multiple payment options, including credit cards, mobile payments, and ACH Collections. Make it easy for customers to pay you however they prefer. If your customers pay by check, consider using Remote Deposit Capture to deposit payments faster without having to make a trip to the bank.
- Consider giving customers a discount for paying early. It is not uncommon for contractors to offer a 2-3% discount if the customer pays in 10 days or less. While this does result in lower profits, it could be help you to maintain positive cash flow.
3. Controlling Cash Out
All businesses have expenses, and they are always looking for ways to improve efficiency and reduce costs. While you should be keeping an eye out for unnecessary expenditures, you can also consider other ways to make handling your accounts payable easier.- Evaluate your expenses and eliminate things that are not necessary or that are not adding enough value to your business.
- Time the payments you make to coincide with when you typically receive payments from your customers. For example, if you know your loan payment is due on the 20th, but your customers don’t usually pay you until the 30th, you can change the delivery date or terms of their invoices or talk with your lender to see about moving your due date.
- Embrace electronic and ACH payments. Using electronic and automated payments can help ensure your bills are paid on time and reduce manual errors.
- Negotiate with vendors. Explore opportunities to negotiate payment terms and secure discounts with your suppliers. If you have a good relationship with your vendors and a history of paying on time, they’ll be more likely to agree to an adjustment if you ask.
4. Increase Revenue
It almost goes without saying but increasing your revenue – the money that comes into your business – will help improve your cash flow. The more money you have coming in, the more you will have to cover expenses. Here are four ways you can increase revenue.- Expand your customer base. Implement marketing strategies or promotions to attract new customers and expand your reach.
- Increase average sale amount. Cross-sell, upsell, or bundle products and services to increase the value of each customer transaction.
- Encourage repeat purchases and brand loyalty. Develop loyalty programs and personalized offers to foster customer loyalty and encourage repeat business.
- Adjust prices. Regularly assess your pricing strategy and consider modest price increases to align with market trends and maintain profitability.
5. Secure Credit Before You Need It
Even if you’ve got a healthy cash flow right now, having backup funds available can help you deal with the unexpected. Securing business credit before you need it can help you avoid unnecessary stress and can quickly provide the cash you need to get through cash flow challenges.- Consider applying for a business line of credit to support inventory growth and accounts receivable growth. A line of credit will have a limit, which is the most money you can borrow at one time. You don’t have to borrow any money immediately and can choose when and how much to borrow, up to your limit. You can keep your credit line open and available in case you need additional cash.
- A business credit card can support your cash flow needs while helping you manage expenses and employee spending. The Farm Bureau Bank Premier Business Visa also lets you earn rewards on every qualifying purchase.
6. Inventory Management
Sitting on a huge inventory of product and supplies is essentially tying up your money and can result in an inability to meet your financial obligations or missed opportunities for growing your business. It is important to strike a balance between having enough supplies and product at hand to meet demand, while not having too much just sitting around.Implementing inventory tracking systems or management tools to monitor stock movement, prevent stockouts, and reduce carrying costs can help you ensure that you’ve got just the right amount of inventory without tying up your cash. Keep up with the inventory and assets you already have to avoid purchasing duplicates, accruing extra costs to fill backorders, and paying for more storage space than you actually need.
Talk to a Banker About Tools to Optimize Your Cash Flow
Farm Bureau Bank Commercial and Relationship Bankers are an excellent resource to connect you with the tools and products you need to manage your business’s cash flow and get the most out of your funds. We work with customers from start to finish to look at your current banking needs and recommend the best solutions for you. With our Build Your Own Treasury Solutions, your business can take advantage of powerful treasury management services with very low balances. You know your business best, and we want to empower you with the tools you need and nothing you don’t.You can speak with a treasury solutions specialist by calling us at 855.445.5138 or via email at [email protected].
Tags: business banking, deposits, savings