Cashflow is the life force of every small business and is a major determiner of whether or not your business would thrive. In recent times, there has been an increasing trend of small businesses in Africa closing up primarily due to cash flow issues. According to a financial experts at PWC, 80% of failed small businesses in Nigeria are due to poor cash flow management.
Despite the many benefits small businesses enjoy in terms of financial grants and mentorship, if you do not manage your cash flow properly, that could be the end of your business. Luckily, you do not have to be an accounting or financial expert to get a hang of this. By learning the right strategies and properly implementing them, cash flow problems would soon become the least of your worries.
In this article, you would learn what proper cash flow management entails and strategies for a faster and more efficient cash flow for your small business. Do well to read till the end.
What is cash flow management and why is it important to my small business?
Cash flow management is a term used to describe a set of practices through which business owners monitor, assess, and enhance the financial performance of their business. Ideally, any financially stable business should be able to balance its inflow and outflow as this indicates that the business is liquid enough since businesses need money to make money. If your business is recording more outflow than inflow, it is only a matter of time till it comes crashing down.
As a small business, the benefit of managing your cash flow properly cannot be overemphasized. Mainly because at this stage all funds should be directed toward improving operations and scaling your business. Some benefits of having a healthy cash flow include;
- Improved business finance
- Reserve for unforeseen circumstances
- More money to scale your business
- Helps you anticipate and prepare for cash surpluses and shortages.
While managing your finances effectively is critical if you want to keep your business running, it becomes more pertinent if you want to grow and expand your brand, it’s even more important.
What strategies can small businesses use to manage cash flow effectively?
Understanding what works for your business is important. While there are several strategies for a fast and more efficient cash flow for your business, you must understand that these strategies are not one size fits all. Depending on the nature of the product or services your business offers, you might find some to be best suited for your business needs than others. But bearing in mind the peculiarities of your business, you would find one or a combination of them to adopt. That being said, here are some strategies you can adopt.
Identify the financial state of your business
Start by knowing where your business is financially by understanding how much money comes in and goes out as this would help you track your business growth. A fun fact is that you don’t need to be an accounting expert as there are lots of tools and apps dedicated to making your life easier as it relates to managing your cash flow.
Prioritize cost reduction
As a small business, you must understand that you need all the funds you can get to scale your business and improve your operation. Despite how casual it seems, it is just as important as improving sales. you would be surprised at how much you can save by just cutting down on some expenses. If you’re just starting, except the nature of your business requires, you don’t need a fancy store or office. In today’s digitalized world, all you need is a good social media presence and the right marketing strategy to get your business in the faces of your prospective clients or customers. Instead of rushing into hiring immediately, focus on learning all that you can to keep your business running, or in extreme cases when your business begins to scale, you could consider adding some part-timers to your team.
Set up emergency funds
Just as you have personal cash reserves, your business needs one just as much as you do. Dedicate a certain amount of your profit to an emergency reserve so you would have something to rely on when times get tough. Your business’s emergency fund should ideally be able to pay for three months’ worth of expenses, including employee salaries, operational costs, utilities, and other necessities.
As a small business, there are times when you would be faced with a situation when your clients might delay payment and you would need money to keep your business afloat, invoice financing is a ready solution for your cashflow troubles. By approaching an invoice factoring provider to sell the invoice and get the money upfront with a considerate fee attached. That way, you would have enough cash flow to continue business operations.
Cash flow plays an important role in every small business and is a major driver of business growth. Therefore you should be more intentional by considering the above strategies and adopting the ones that are best suited to your business needs. If you’re interested in more tips for small businesses, you’re welcome to check back. We hope you found this article helpful.