In today’s fast-paced business environment, managing cash flow is vital for the survival and growth of small businesses. Cash flow is the lifeblood of any company, as it ensures that you have enough funds to cover your day-to-day expenses and invest in future growth.
In this blog, we will look to answer what is cash flow, why is cash flow important to small businesses, 6 ways small businesses can increase their cash flow, and how to use debt to increase cash flow. If you are a small business owner, looking to improve your business, this article is perfect for you.
What is cash flow?
Cash flow refers to the net amount of cash and cash equivalents moving into and out of a business. In essence, it’s the money that flows into your business through sales, investments, and financing, minus the money that flows out through expenses, debt payments, and other financial obligations.
Why is cash flow important to small businesses?
Unlike large companies with large cash reserves, small businesses typically operate on tight budgets. This is why small businesses need to keep a closer eye on their cash flow. Here are 3 reasons why cash flow is important to small businesses:
- Sustainability: Cash flow is important for small businesses as it ensures you can smoothly run day-to-day operations. Cash flow helps pay for employees, rent, inventory, and other expenses that keep the business afloat.
- Growth: A healthy cash flow enables businesses to invest in growth opportunities, hire more staff, and enter new markets that ultimately grow the business. Cash flow is vital in the building of long-term success.
- Emergencies: Business can be very unpredictable at times. Cash flow can provide a cushion that allows businesses to weather challenges like economic downturns or sudden increases in demand. A healthy cash flow provides the agility needed to navigate through uncertain times.
6 ways small businesses can increase cash flow
There are two main components to cash flow, cash flowing into the business, and cash flowing out of the business. Business owners should look to maximise the amount of cash coming into their business and minimise the amount of cash coming out. Here are 6 ways small businesses can improve their overall cash flow:
1. Increase prices
Evaluate your pricing strategy. If a certain product or service constantly sells fast, consider increasing its price. A slight increase in prices can lead to a significant boost in revenue.
2. Improve accounts receivable system
Collecting the money that is owed to you is the fastest way to increase your cash flow. The payment process should be as easy as possible for your customers. Accounts receivable systems can be improved by offering a range of payment options, sending invoice reminders, requesting deposits before the product or service is delivered, and offering discounts for early payments.
3. Increase volume of sales
Increasing the volume of your sales can bring more cash into your business. You can increase sales volume by improving your online presence to acquire more customers, introduce a new range of products or services, and reconnect with existing customers who have previously made a purchase.
4. Check your inventory
Your inventory can either tie up your capital or represent missed sales opportunities. Regularly assess your stock levels and aim to replace slow-moving items with fast-selling products. Consider bundling slow-moving items with popular ones to encourage sales.
5. Improve staff management
Having efficient staff management can reduce your overall expenses which increases cash flow. Retain good employees by hiring staff with aligned goals. This reduces the cost of hiring and can keep work productivity high. Consider flexible staffing arrangements that correspond to busy business periods. This can help avoid unnecessary labour expenses during slower times.
6. Invest surplus cash
The money coming out of your business needs a place to go. You need to optimise the use of your excess cash. Consider placing your excess cash into an interest-bearing savings account or other investment vehicles. This allows your excess cash to generate additional income for your business.
How to use debt to increase cash flow
One of the most common ways businesses can expand and increase their future cash flow is by taking on debt. While some people are sceptical of taking on financing, obtaining a healthy level of debt can fast forward the process of boosting cash flow.
Cashflow finance can take many forms such as overdrafts, lines of credit, term loans, asset finance, and many others. Here are some ways small businesses can use debt to increase their cash flow:
- Expansion financing: The main reason businesses take on debt is to expand operations. By expanding operations like opening new locations, businesses can potentially increase their volume of sales.
- Inventory financing: Businesses can secure loans to purchase inventory. This is useful to meet high demand and ensures the business still has enough capital for other purposes.
- Equipment finance: Finance can also be used to purchase necessary equipment that generates revenue for the business. Without taking on debt, businesses may ineffectively use cash that can be vital for other business purposes.
- Debt consolidation: If you have existing debt, consider combining your high-interest debt into a single, lower-interest loan. Consolidating your debt can improve your cash flow as your interest expenses decrease.
Are you looking for a Finance Broker?
One Click Life can help small business owners find finance lenders to grow their businesses. One Click Life has a team of expert finance brokers that can help you choose a lender that suits you. One Click Life can also look after your Health Insurance, Will, and Taxes so you can enjoy the more important things in life.