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The financial stability of your business is directly tied to effective cash flow management. Working capital, the cash available for daily operations, must be sufficient to cover expenses until customer payments are received. Over-investment in fixed assets can lead to a cash crunch, hindering your ability to pay suppliers, purchase materials, or meet payroll obligations.
This then makes it critical for you to maintain a level of working capital that enables you to make it through those tough times whilst still being able to continue smooth operations. Hence, for the financial health and sustainability of your business, smooth cash flow management becomes key.
Essential Cash Flow Management Best Practices
Here’s a list of 10 essential best practices for managing your cash flow effectively. Implementation of these best practices can help business owners like yourself not only improve your cash flow management but also experience long-term financial success.
1. Consider Leasing Assets
Leasing assets, instead of purchasing them outright, can free up cash flow for daily business operations. Leasing allows for smaller, incremental payments for asset use, with the potential for ownership at the end of the lease period.
2. Prune Underperforming Assets
If you have assets that are no longer in use, don’t just let them collect dust. Consider selling them to generate some quick cash you can use to cover business expenses.
3. Increase Your Pricing
While it might seem controversial, increasing your prices will not necessarily lead to reduced sales. It’s perfectly normal to experiment with pricing until you find the perfect number. There’s no way to determine how much customers are willing to pay for your offering until you try. You should maintain regular communication with your customers to discuss and assess pricing before making any changes. Having a clear communication plan in place is crucial, as any missteps can result in customer frustration and a negative experience.
4. Budget Well
While it may seem easier said than done, there are a range of budgeting and financial planning tools you can utilise to set budgets, track your expenses, and predict future cash-related outcomes. The Australian government offers an in-depth budgeting tool you can use to set realistic business goals for yourself.
5. Cut Unnecessary Spending
If your spending exceeds your income, you need to reduce expenses. Determine priority areas where spending is necessary and identify other areas where you can adjust your spending approach. The easiest way to do this is to reduce your spending on low-usage subscriptions, utilities, and services.
6. Have a Cash Reserve Ready
You never know when a rainy day might strike so it’s best to always have savings available in the event of the unexpected. Start a savings account from day one and add to it incrementally. It would be ideal to achieve a stable cash reserve that can help manage business expenses for a couple of months whilst you gain your footing again.
7. Automate Your Payments
Automated payments and invoicing systems help remove the complexity involved in cash flow management. Through automation, you’ll be able to send invoices to your customers at a faster rate, track your payments, and set reminders for payments, ensuring that you maintain a steady cash flow payment and disbursement schedule.
8. Effectively Manage Your Inventory
Don't delay inventory management. With accurate and timely inventory management, you'll be able to reduce excess stock, freeing up storage costs. Likewise, prioritise fast-moving goods to optimise your inventory. Moreover, utilise the latest tech to enhance your inventory forecasting so that you'll always have optimum stock levels.
9. Form a Cooperative
Just as the saying ‘there’s always strength in numbers’ goes, the same applies to effective cash flow management. Identify a group of traders that sell similar goods and/or purchase from the same suppliers. Together, form a cooperative and bargain for better terms with your suppliers. Chances are, by buying in bulk, you’ll be able to receive a better rate for your goods.
10. Set Realistic Expectations
As a business owner, if you’re currently struggling with cash flow related problems, don’t push it under the rug. Be open and honest with yourself and accept the situation you’re in. Take time to go through the first nine steps outlined above and strive for practical solutions. Every step forward, no matter how big or small, towards better cashflow management is a win for your business.
Keen on Growing Your Business? Let Mighty Partners Help
If you're on top of your cash flow and ready to take your business to the next level, Mighty Partners has your back! We offer venture debt funding to help small and medium-sized businesses like yours grow faster.
We get it– smooth cash flow is key to unlocking your business's potential. That's why at Mighty Partners, we treat your business like it's our own. Get in touch with us today!
