Running a successful business is like planting a garden — it requires careful nurturing and attention to ensure that the roots of cash flow remain strong, enabling the business to bloom and flourish.
In fact, knowing how to handle cash flow in a business can make or break it. Let’s dive in!
What Is Cash Flow Management?
Before going any further, let’s examine what cash flow means.
Simply put, cash flow management is monitoring, tracking, and optimizing the inflow and outflow of money throughout the business. The goal is to forecast needed funds to cover expenses like bills, debts, payroll, and more.
The Categories of Managing Cash Flow
Cash inflow means money coming into the business through sales, earned interest, and more. Cash outflow is the money going out of the company toward expenses.
A few categories are used to classify cash flow transactions throughout the company:
Cash Flows from Operating Activities
Cash flows from operating basically mean the money moving through regular business operations. It includes inflowing cash from sales income and outgoing costs for production, supply, and more.
Cash Flows from Investing Activities
This cash is generated or spent through investment activities. It may involve outflows like buying securities, properties, or businesses. Inflows can come from selling other companies or securities.
Cash Flows from Financing
Financing cash flow represents the funds a business raises and repays to investors over a specific period.
How to Manage Cash Flow
Business owners need to learn how to manage cash flow as early in their journey as possible. The best way to start the process is with cash flow statements.
A cash flow statement records the inflow and outflow of cash through the business during a specific period. It could be a week, month, year, or another custom time frame. Owners can effectively monitor cash flow in their business by tracking any desired period.
The correct period track can depend on the size and operation of the particular business. Many businesses track their cash flow week-to-week, but other small businesses may only need to do it every month.
With small businesses, it can often be challenging to track and forecast too far into the future. A good rule of thumb is to plan around 6-8 weeks ahead of time.
Steps to Starting Cash Flow Management
Now, let’s look at some effective cash flow management strategies for business owners.
Forecast Expenses
Forecasting expenses and financial obligations is the first step towards mastering cash flow management. Make a record of everything the business has to pay, including:
- Rent
- Payroll
- Subscriptions
- Loan repayments
- Production costs
- Anything else that takes out of the bottom line.
Include all anticipated business expenses for the upcoming weeks. Recalling every detail from memory might be challenging, so consider reviewing bank statements or invoices to ensure comprehensive coverage.
Forecast Earnings
The next move is to predict incoming revenue and earnings. Take into consideration the weekly revenue inflow. Earnings may vary weekly, so aim for as much accuracy as possible. Forecasting will get more manageable as the business continues to run over time.
There are several factors to consider when accounting for upcoming revenue.
Firstly, consider any guaranteed income, such as subscriptions or service contracts. These will be the easiest to forecast ahead of time.
Then, try to forecast future sales from new customers or clients. It will be harder, but past data can be reviewed to generate an estimate. If there is data available from the year prior, check into what the period was like the previous year for an estimate.
Pro tip: If you sell online with Ecwid, you can use the Reports dashboard to check your previous sales data and trends to make an even more accurate prediction.
Also, make sure to account for seasonality. If there are any upcoming holidays or promotions, these could positively or negatively impact revenue, depending on the industry.
Balance Out Revenue and Expenses Forecasts
The next step is to balance out the two separate forecasts to understand the cash left in the business. The basic calculation for this is subtracting the money out from the cash in. Doing this for a month will tell the business its financial position for the end of the month.
By understanding this, the business can make informed decisions and use the remaining cash effectively. It is the starting point for managing their finances as they embark on a new month.
Initially, this may be a bit complex or tedious, but as it becomes a regular practice, it’ll get much more manageable. You can find a variety of cash flow management templates online to kickstart your business, along with specialized cash flow management software.
Cash Flow Management Techniques for Success
Now that we’ve covered the general basics of managing cash flow, let’s look at some ways to improve it.
Track Your Business Financial KPIs
The first step in effectively managing cash flow is to track and understand your business’s financial KPIs (key performance indicators). These metrics can help you gauge the overall health of your business.
Some examples include revenue, profit margin, and expenses. By monitoring these KPIs regularly, you can quickly identify any potential issues with your cash flow.
For example, if your profits are decreasing while expenses are increasing, this could signal that you need to make some changes to improve your cash flow.
If you sell online with Ecwid by Lightspeed, you can track some of your business’s financial KPIs with the built-in Reports. This tool lets you view and analyze your real-time sales, profits, expenses, and other vital metrics.
The Accounting section in the Reports is especially helpful for cash flow management, as it lets you stay updated on your financial flows. It provides valuable insights into your store revenue, expenses, average order value, and average revenue per customer and visitor.
Learn more: Essential Business KPIs for Online Stores & How to Track Them Like a Pro
In addition to tracking financial KPIs, it’s also important to regularly review your financial statements, such as balance sheets, income statements, and cash flow statements. These documents provide a detailed overview of your business’s finances and can help you identify any areas that may need improvement.
Consolidate and Control Inventory
Stagnant or underperforming inventory can be a quick way to suck up cash flow within a business.
Be sure to conduct regular inventory evaluations to review supply and demand, which products aren’t selling, and which are. It will allow the business to remove stock of products that aren’t contributing to the cash flow and stock more of the products that are. It can help to cut down costs on producing underperforming inventory, as well as the associated storage costs.
Another important KPI to track is your inventory turnover ratio. It measures how quickly you sell through your inventory and can give you insights into your inventory management efficiency. A high inventory turnover ratio means you are effectively managing and selling your products, which can positively impact your cash flow.
Negotiate with Suppliers
Cutting down on supplier and manufacturing costs can be an easy way to keep more cash in the business. An essential part is learning how to properly negotiate with suppliers to achieve the best but most harmonious arrangement.
It may be difficult for businesses starting out, as suppliers may not be willing to go down much on beginning orders. However, as the company maintains and builds a relationship with the supplier, they should arrange better terms. Some suppliers may even offer early pay discount options.
Lease, Don’t Buy
This point seems counterintuitive at first. After all, long-term equipment and property leasing typically becomes more expensive than buying. However, this is a better option for businesses that don’t have a lot of extra cash to toss around.
Leasing means paying in smaller increments, which can improve cash flow over monthly periods. Additionally, every lease payment is a tax write-off.
Take Advantage of High-Interest Savings Accounts
Many banks offer high-interest business savings accounts that can perfectly capitalize on the current in-house cash. Deposit money into a savings account with 1% interest or higher to earn additional funds that can help prepare for future expenses. Some banks even offer business bank accounts with interest rates of 4% and higher.
Benefits of Effective Cash Flow Management
Managing cash flow can initially seem tedious, but it can also benefit a business in multiple ways, such as:
Reduce Stress
Managing cash flow will help businesses know they have all expenses covered and where they stand each month. It takes a lot of the guesswork and worry out of paying bills.
Plan and Cover Shortfalls
Knowing where the business stands on expenses can help in planning for and handling shortfalls or difficulties. If it looks like the business will be short one month, they can preemptively run promotions to drive sales or ask for a delay on rent. While this is hopefully never the case, every potentiality can’t be predicted, so it’s better to be prepared and know ahead of time.
Improve Inefficiencies
When you dive into the business’s cash flow and brainstorm ways to enhance it, you might uncover inefficiencies in how things run. Take supplier costs, for instance. Say you’re going through the cash flow and realize a big chunk is going into manufacturing expenses. So, you start negotiating for a better deal. Maybe this didn’t cross your mind earlier, or you’d have looked into it way down the line.
Budgeting Accuracy
Budgeting may not be the most exciting task, yet it plays a crucial role in business and personal finance. By consistently managing cash flow, companies can establish a more accurate budget, enabling better predictions and decision-making down the line.
Ecwid Is Here to Help You Launch Your Ecommerce Store
Launching an ecommerce store has never been easier in the modern age. If you are considering starting your own online store, Ecwid can help you make it happen. Our selling platform is easy to use and provides you with robust online selling tools.
Apart from a beautiful ecommerce website, you’ll also get tools like Reports and integrations with accounting software like FreshBooks, Xero, or QuickBooks to help you better manage your finances. These tools will help you understand where your money is coming from and where it is going, giving you the ability to make informed decisions for the future of your business.
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Anastasia Prokofieva, Khareem Sudlow
