When you’re busy doing the countless number of tasks associated with launching a new business, it’s easy to overlook cash flow. Unfortunately, this is an all-too-common mistake made by entrepreneurs. After obtaining the necessary capital to get their business up and running, they neglect to monitor and nurture their flow of cash. Over time, this can send an otherwise profitable business tumbling into the red zone. So, what steps can you take to better manage cash flow for your business?
Positive vs Negative Cash Flow
It’s important to understand the difference between positive and negative cash flow. Positive cash flow is when the revenue generated from your business (sales, accounts receivable, etc.) is greater than the total of your business-related expenses (e.g. payroll, marketing/advertising, accounting, etc.). Negative cash flow is the exact opposite, occurring when your business-related expenses are greater than your revenue.
Focus on Positive Cash Flow
Some business owners and entrepreneurs focus their attention towards profits. While metrics like net revenue and profits are certainly useful, you should really pay attention to your business’s positive cash flow. Positive cash flow indicates more money coming into your business — money that can be used to grow and expand your operations.
Create a Rainy Day Fund
How much money does your business have saved in case of emergency? The truth is that many small business owners have little-to-no cash reserves. Hopefully, you’ll never have to use it, but it’s always a good idea to have some cash reserves available just in case things turn south.
If possible, consider extending your payables to a longer pay-by date. If you can extend the pay-by date for independent contractors, distributors and other clients with whom you do business, you’ll be able to keep your cash for a longer period of time; thus, making it easier to balance your cash flow.
Eliminate Unnecessary Expenses
Of course, you can always improve your business’s cash flow by eliminating unnecessary expenses. Even if your business is currently turning a decent profit, chances are there’s room for improvement. Go through your monthly and/or weekly business-related expenses, identifying ones that you can either eliminate or reduce. If you are spending thousands of dollars on a marketing campaign with nothing to show for it, for instance, perhaps it’s a good idea to stop.