Stable finances are at the core of every successful business. Even large companies can fail without a steady cash flow and controlled expenses. Every year we see around 600,000 new companies in the United States, but only a little more than 50% makes it to year two or three. That means that every new business has a 50% chance of failing. That mostly happens because of the lack of cash. Managing small business finances is a difficult task, and the entire success of your company depends on it.
That’s why we will show you how to make critical financial decisions. If this is your first time opening a business, this is a guide you have to check out. You will learn all about the crucial early decisions and any financial difficulties you’re going to face. Your limited experience in managing finances should not be a factor that will cause your business to fail.
Tracking and Managing SMB Cashflow
To avoid cash crunches and manage cash flow, you first need to understand different types of cash flow. That is all the money that moves in and out of your company. That is a process that constantly happens. You invest money in new products and marketing campaigns, and it returns as a profit. To better understand incomes and expenditures,You need to understand the difference between positive cash flow and negative cash flow.
Positive Cash Flow
Having a positive cash flow is the goal of any business. Your income is larger than your expenses, and that allows your company to grow. Positive cash flow is vital because of the profit and because it enables you to pay company bills and any unexpected costs without investing more of your money. If you have a positive cash flow most of the time, managing small business finances is your strong suit.
Negative Cash Flow
Negative cash flow is something that every business must experience in one moment. For example, if you are waiting on customers to make payments or purchasing new equipment for the company. At that moment, you are spending more than you are earning. This is a common business situation, and it may lead to additional bank loans to cover the losses.
If you wish to help your company thrive, you need to revert to a positive cash flow as soon as possible. That means you need to have a plan for every situation. If you are planning on buying new equipment, make sure you have some money on the side. Also, if the customers are not paying on time, you need a strategy that will allow you to power through the difficult period.
A Proactive Approach is the Best Solution to Negative Cash Flow
As we have mentioned earlier, a positive cash flow allows you to pay company bills, invest more money into business processes, and make a profit. Monthly company expenses are enormous, and if you experience negative cash flow for just a few weeks, it can spell doom for your business.
To prevent this from ever happening, you need to apply a proactive approach.
Create Cash Flow Reports
The first step is to create daily, weekly, and monthly cash flow reports and forecasts and keep things in check. If you notice you are going out of a positive cash flow pattern, you need to start making changes.
Consider purchasing accounting software. That could turn out to be one of the better investments because it will allow you to easily track all of the critical financial aspects of your business.
Define Payment Terms
Depending on the nature of your business, you can take payments immediately or over credit to the customers, so they can postpone the payment for even up to three months. Longer payment terms are an excellent way to attract more clients to your business. However, you need to be careful. If you don’t have a solid plan that will allow your business to continue running without immediate payments, you should never offer extended payments.
It is a fact that late payments are the first cause of a negative cash flow. Try to encourage your customers to pay on time. For example, you can go for a positive approach and offer discounts or better terms of payment as an incentive for quick payments. Or, you can start charging an interest rate for any late payments.
Pick Your Clients Carefully
Fulfilling an order costs money. Imagine what will happen if you fulfill an order for a customer, and they refuse to pay at the end, or they change their mind. All of the resources that went in are lost, and there is no profit. You need to pick your clients carefully and only work with leads that have a high score.
Finding new leads is always a challenge. You should get as many leads as you can because that opens many doors for your business. If you have a steady influx of potential customers, you can focus on lead scoring and pick quality leads for your business. If you don’t have a lot of leads, you have to work with what you have.
Set Measurable Goals
When you start doing business, you need to know your goals. Keeping track of finances is easier if you know what you are trying to accomplish. You have something to compare with your current budget and profit. Without measurable goals, you will find yourself stumbling in the dark.
Creating a plan of action also allows you to manage your profit better. If you don’t have a plan for the next stage, you might end up spending too much of the earned money without scaling or growing your business.
Guide to Managing Small Business Finances Made Simple
Managing small business finances is not easy, but we hope our guide has made it a bit clearer. Take care of your cash flow, and create a steady plan of action. Money losses are a common thing in the business world. The important part is to know what to do when it happens and how to bounce back quickly.
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