Steps To Improve Cash Flow Management for Small Business

Cash flow is the circulation of capital in and out of your business. We can refer to cash flow in a common language as incoming and outgoing funds. Startups and small businesses often focus on profit and ignore Cash Flow Management, which results in closure or losses. Cash flow is the very blood in the veins of your business, and it should be your priority at the time of the conception stage of the entity.

Cash Flow Management improves the flow of business ideas for better control and stability through the rough waters. In this blog, we will address the common mistakes small businesses commit and how to increase business cash flow. Understanding the pain points improves the business performance and hence the cash flow.

Let us get started with the definition, types, and activities of cash flow management.

What is Cash Flow Management in Business?

Cash Flow Solutions for Small Business refer to tracking inflow and outflow of funds in the business. The system helps make decisions about money you need to pay for supplier’s or lender’s debts, salaries, etc.

Your business will be better positioned to predict the amount of money available for business requirements in the future and tackle financial problems with the company.

Cash Flow Techniques keep track of all receivables and payables to maintain a balance in your business operations.

Categories of Cash Flow in Businesses

There are broadly two categories of Cash Flow for Small Businesses: Positive cash flow and Negative cash flow.

Positive cash flow

Positive cash flow means your funds through sales, services, and other business receivables are more than spending on employee salaries, office expenses, vendor’s payments, etc. It means your business is in good health to function smoothly.

Negative cash flow

As the name suggests, negative cash flow is the opposite of positive cash flow. Small businesses experience more expenses than receivables. To survive and grow in business, apply cash flow techniques. Use AI and ML-enabled latest software for managing cash flow efficiently.

Types of Activities related to Small Business Cash Flow Management

Operational Activities: Monetary activities during business operation related to the net income

Investment Activities: Monetary activities related to non-current assets

Financial Activities: Monetary transactions related to business owner’s equity and non-current liabilities

We have explained in brief about cash flow management, types, and activities for small businesses. In the next section, we will mention a couple of significant reasons for the early-stage failure of small businesses and startups, followed by steps that improve the flow of business ideas.

Challenges and Reasons to Fail in the Initial years for Small Businesses

Early-Stage Finance Crunch

Working capital and seed fund are essential to launch & operate a business. A disconnect between your revenue and expenses led to business loss and failure. You can consult leading NBFCs like FlexiLoans for online business loans and manage the financial challenge during the initial years.

Apply for business loans at reputed NBFC and financial institutions to avoid market-related risks and security of the fund. Their interest rates for business loans in India are competitive. These lending bodies decide interest rates according to the guidelines of the Reserve Bank of India.

Pricing too Low

Small businesses tend to keep prices of products and services lower than the competition to attract new customers. This led to negative Cash Flow for Small Businesses and a severe challenge in managing the day-to-day business operations.

Cash Flow Solutions for Small Businesses to handle the financial problem

• Make a realistic business plan and budget.
• Arrange capital funding based on a business strategy including expected income and expenditures, especially during the breakeven period

Inadequate Cash Flow Management

Small business owners manage everything on their own, resulting in mismanagement in the cash flow, operations, etc. You need experienced and professional managers to manage the business, even in its early years. The best source to procure talents in the early years is your network and social circle.

A sound small business plan must include the following;

• A clear description of the entity and plan to arrange capital
• SWOT Analysis (Strengths, Weakness, Opportunities, and Threat)
• Plan about future management, operation, and HR requirements
• Competitor Analysis and Market research

A proper business plan gives strength to the business and optimises cash flow management efforts.

Lack of a Dedicated Marketing Plan

Marketing, both traditional and digital, is a crucial part of any business. You cannot ignore marketing at any stage of the company because ‘jo dikhta hai wahi bikta hai’. Make a separate budget for the marketing and use a balanced approach of ATL, BTL, and TTL marketing methods to promote business products and services.

These are vital points to consider for small businesses and startups. An effective and efficient Cash Flow Management depends upon a business plan, marketing plan, and financial backup. After common mistakes, let’s go through how to increase business cash flow.

Steps to Improve Cash Flow Management for Small Businesses

Identify Problems and Challenges

Start with making a list of questions such as:

• What if that deep pocket client converts?
• How to manage long-term projects?
• How to deal with dues?
• How to arrange funds for expansion?

Cash Flow Techniques should involve a risk analysis approach and answer these crucial questions about operations to prepare in advance.

Do not Mix Personal and Business Transactions

Startups and small businesses start mostly with family members, networks, etc. Owners generally invest from personal savings and use a personal account for business purposes. You should maintain separate accounts for personal and business, do not mix them.

A separate business account helps in getting a credit card for payments. You can track payables and receivables monthly, quarterly, and annually. This type of information will help in efficient cash flow solutions for small businesses.

Businesses can apply for a line of credit loan offered by leading NBFCs and banks. You can get details of the line of credit loan in your business account statement.

Managing Cash Flow with Inventory Management

Inventory management is crucial to maintain a healthy cash flow. Keep track of highest selling and least selling goods & services. Remove stuff that is consuming too much space and providing very little revenue.

Attain optimum Cashflow Management by eliminating unproductive inventory and new working capital.

Small businesses can avail benefits of working capital loans, MSME business loans, and the Government of India initiated Mudra loans. Apply for these schemes and loans to fulfill the financial requirements of the business.

Buffer Money as a Cash Flow Management

Buffer Money is essential throughout the business life cycle, whether it breakeven period, operational purposes, day-to-day expenses, etc. Traditionally three-month buffer money was considered standard for a healthy cash flow business.

Businesses can keep a buffer in terms of personal savings, overdrafts, properties, investments, and so on.

Control Inflow-Outflow of Funds

Startups and Small Businesses can adopt the following measures for optimised Cash Flow Management:

• Make invoices on time and do a professional follow-up for timely payments.
• Take office property on lease, optimum application of utilities, etc. Save on monthly billing.
• Use staff tracking software for salary, performance evaluation, feedback, and many more
• Research the market and procure equipment, office furniture, computers/laptops at the best rate. Book a bulk order on e-commerce platforms for the best deals. You can also use their Mega Sale offers.

Brainstorm with your core team and reduce any overhead expenses for small business cash flow management.

Minimise Gap between Receivable and Payables

Receivables and payables are a continuous process that runs the business. There should be clarity with both for smooth cash flow management.

An example here will make it easy to understand. Suppose you are paying vendors in 30 days and allow customers 45 days for payment. This system will create a gap in receivables and payables.

Apply best cash flow techniques and minimise the gap for sufficient funds at the time of payments and the buffer money.

Get Rid of Malfunctioning Equipment

Malfunctioning equipment raises the cost of production and operation. These over-used machines need regular repairs and maintenance.

Replace them with new and efficient types of machinery. Cash Flow Management means optimum utilisation of available resources to reduce unnecessary fund outflow. Replace malfunctioning types of machinery and save technological transformation.

Technological Improvements

Technology brings convenience and smartness to the business. Use the Internet of Things-enabled sensors, trackers, wearables, etc. and improve the overall business performance.

Technology brings efficiency, saves on cost, boosts productivity, and brings transparency.

Multiple payment options

Multiple payment options will enhance receivables. People feel comfortable when they have several modes of payment. Expand the payment options such as Debit and Credit cards, E-Wallets, Internet Banking, Cash, Bitcoin, etc.

Professional Customer Support

Small businesses often overlook customer support as an essential ingredient for improved cash flow management. Keep all channels open for communication such as emails, phone, in-person, website, etc.

There should be a personalized touch in your communication for pre-and post-sales to boost customer experience and eventually positive cash flow.

Concluding Thoughts

Cash Flow Management provides a balance between receivables and payables. Refer to the passage, improve cash flow in the business, remove bottlenecks and have a happy & prosperous business ahead.