If there’s one thing that all 30.2 million small businesses in the US agree on, it is that managing one is not always smooth sailing. According to the Bureau of Labor Statistics, around 20% of small businesses fail in their first year alone. Now more than ever, small businesses need to be ready for the challenges of managing cash flow. Working with negative cash flow can seriously hinder your ability to meet your business expenses, pay your business debts, make payroll, and take advantage of opportunities to grow your business. Before you experience cash flow problems, take note of the following tips that can help first-time entrepreneurs manage cash flow better.
1. Determine your break-even point.
The purpose of determining your break-even point is to calculate the number of sales needed to equate your revenue to your expenses. It may not necessarily help you with your cash flow, but knowing your break-even point is the basis for many aspects of your business. It can serve as guidance for your forecasting and budgeting plans. You can also incorporate it into your pricing strategy to ensure that you are making money for every product you sell or service you provide.
2. Create a cash-flow-based budget and stick to it.
A little planning can help your business avoid a shortage of cash. The most useful tool for planning your limited cash resources is a cash-flow-based budget. A cash-flow-based budget is an estimate of your cash inflow and outflow that are expected to occur in a specific period of time. Take note that cash flow budgeting takes into consideration just the movement of cash and not revenue. To create a cash-flow-based budget, you will need to first determine how much cash you get from sales and the collection of your receivables. Next, project your cash outflows, which typically include office supplies, payroll, rent, loan payments, and equipment maintenance. Adding your inflows and subtracting your outflows will show your target cash balance. Finally, try your best to stick to your budget and avoid impulse spending.
3. Check your potential clients’ history before extending credit.
The risk of nonpayment every time a business extends credit is a burden all entrepreneurs carry. Extending credit is a huge part of business as it facilitates smoother sales transactions. What you can do, however, is to minimize this risk. One way to do so is by vetting a potential client before extending credit. Ideally, you want a client with a history of on-time payments and a good credit score. If you want to save yourself from the headache of invoice collections, avoid clients with a less-than-stellar credit history.
4. Improve your inventory management.
One of the biggest factors that affect cash flow is your inventory. You spend your cash regularly to buy inventory which in turn becomes cash again when it sells. In a sense, a huge part of your cash flow cycle depends on your inventory. Poor inventory controls will result in huge costs of carrying inventory. If you don’t track how often you sell your inventory, you will not know when to stock up and may miss valuable sales opportunities. If you end up getting more inventory than needed, you will incur high carrying costs. At this time of economic turmoil, it may feel like the odds are stacked against small businesses. But with ample preparation and a firm grasp of your cash flow, you will be able to handle the challenges of keeping your business afloat.