Being a business owner is fun… most of the time. But part of being a business owner is also managing your cash flow in order to stay operational while covering expenses. At the end of the day, if you make a profit, that’s nice too ;)
In a short series of four articles, we’ll cover how to prevent cash flow issues with these helpful tips!
It goes without saying that we want our cash flow to be positive to prevent issues. A positive cash flow allows your business to settle debts, buy products, pay expenses, and provide a good safety net against future or unforeseen expenses.
In order to maintain a positive cash flow, there are a few key tips your business can utilize if they fit your strategy.
- Working Capital
- Turn Inventory Faster than Industry Benchmarks
- Adopt Short-term Debt
Let’s examine these strategies further:
First up, working capital and cash flow are the two most basic components of financial analysis. Working capital is determined by calculating the difference between your business’s current assets and current liabilities and is equal to the amount of money you have available to pay things like short-term expenses.
Like cash flow, you want your company’s working capital to be positive. You always want to have more assets than liabilities so you can fully cover those liabilities over the next year (short term).
Our tip? There is too much of a good thing… so don’t have too much working capital because it might mean you’re not using your assets properly.
By looking at the cash flow statement you can determine the necessary balance required to keep your liquid assets up while timing your payments as deadlines are approaching.
Turn Inventory Faster than Industry Benchmarks
To prevent lags in cash flow, you also want to have relatively consistent (or at least predictable) sales.
What do we mean by predictable? If there is any seasonality to your business, you’ll be able to forecast trends enough to know when to expect an influx of sales. This is helpful for both buying inventory/knowing how much to have on hand at a given time and for managing cash flow.
However, sometimes when cash flow is relatively stagnant and unpredictable, it’s required to accelerate inventory turnover faster than industry benchmarks by means of sales or promotions. You might not make as much margin but you’ll have cash available to cover other expenses.
Adopt Short-term Debt
Adopting short-term debt (including credit cards) could be strategic, but is often the last resort for many small business owners.
To avoid going into credit card debt you should try adopting the inventory turnover strategy or holding off on inventory purchased with cash (which would reduce the cash flow statement by “inventory purchases”).
In general, we want to avoid short-term debt unless you’re sure you’ll be able to pay it on time.
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