Cash flow management questions keep cropping up for small businesses. It’s a fact of life that many small businesses fail to keep enough cash reserves. This hurts them when it comes to dealing with emergencies and unanticipated problems. Many small businesses also do not pay much heed to cash flow projections. Due to this lack of tracking, gaps that emerge in later stages cannot be mapped with their root causes. It’s fair to say that most small businesses do not have a well-defined cash flow management business plan in place.
For such small businesses, here are some easy-to-follow tips and tricks to effectively manage cash flows and prevent the associated issues.
Good Accounting Practices and Software
Many advanced accounting software packages are now available in the market which can be used by small businesses to manage their cash flow data and organize their cash flows. A number of these software applications are open-source or come with free trials. Small businesses can try these applications to understand the ease of cash flow management that good accounting software can offer.
Spread out the Expenses
It may seem easier to make all vendor payments in one day to minimize the administrative work. Many small business owners have a feeling that this helps them get a better handle on the payments going out. Sadly, this isn’t true. First, money usually comes into the system in many small transactions spread over the month and not in sudden spurts. Second, clearing the bank at the beginning of the month leaves no breathing room for investments or emergencies. Sudden spurts of expenses reflect bad cash flow management. It is better to spread out the expenses to be able to manage the cash flows. Tip – stagger the dates of your automatic payments and EMIs across the month for greater spread.
Insurance Coverage
Insurance is an absolute necessity for small businesses to be able to manage their cash flows when faced with problems that strain the bank balance. Small businesses are always at risk of unexpected losses, damage, or lawsuits. There are physical security risks and damages that a small business must cater to. They may get hit by a natural calamity or other problems. It is not possible to forecast such events in advance. Immediate disaster recovery and management are crucial at such times to emerge unscathed and stay viable. Such disruption costs money and can hit the cash flow cycle of small businesses. With proper insurance coverage, such damages and unanticipated financial risks can be addressed without having to dip into the war chest. This is why smart insurance strategies are a key part of cash flow management for small businesses.
Smart Payroll Management
Small businesses may not have a huge workforce; however, payroll is always a critical part of any business. Organizations must be smart with their payroll for effective business cash flow management. Organizing, optimizing, and formalizing the payroll will help save additional admin efforts for the payroll cycles. This will also make it easier for small businesses to keep track of advances taken, debits to be made for any reason, tax filings, and compliance.
Cost-Benefit Analysis
Businesses continuously look to expand their business operations. This needs investment. However, it is critically important to be aware of the cash reserves and resources available at such times. Doing a cost-benefit analysis is a useful technique to drive more informed decisions. Structured forecasting methods can help these businesses analyze potential cash inflows and map them with tangible and intangible returns. The internal rate of return and net present value can be determined based on these estimates. Potential payback periods can also be calculated using the information. The business can invest with confidence based on this knowledge.
Backup Plan and Alternatives
Small businesses need to prepare for emergencies. They must have a backup plan at all times and must factor in what it would take to make those plans work. For example, if the business is hoping to get a loan then consider the likelihood of getting the loan with the current credit history. What can the business do to improve the history, if that’s what will be needed to get a business loan in an emergency? Plan B might be to use the business credit card. If so, what are the limits available? This is about creating workable options.
Summary
Cash is king and cash flow management essential. This is true for all organizations irrespective of scale. Of course, the task is harder for small businesses given their unique circumstances. That only makes the task even more urgent and worthy of attention.