Running a proper business is more important than chasing after profit. Not only do you need to keep track of your disbursements (e.g., overhead, write-offs, payroll, upgrades, and replacements), but you also need to make sure that your inflow is greater than your outflow so that you’re not running at a loss.
The money that goes in and out of your business is called the cash flow. And if you find that you’re hemorrhaging money more often than not, even when business is good, then you’re experiencing one of the most common problems that entrepreneurs face. If you’re not careful, you could even lose your business.
Whether you’re looking for automotive franchise opportunities or already run a small startup, you need to learn how to balance your cash flow. Cash flow difficulties often happen when the timing of your revenue and expenses don’t align. Liquidity problems can limit your opportunities and even damage your business.
Here are a few tips for managing your cash flow.
1. Start a projection
The first thing you need to do is to understand your finances. If you don’t know when and where your money is coming and going, then you won’t have the slightest idea why you’re having cash flow problems.
A cash flow projection allows you to estimate how much money is coming in and out of your bank accounts, and when. You have to consider the day-to-day costs of running your business (e.g., payroll, utilities, rent, loans), as well as future expenses such as repairs, replacements, and inventory. Next, you need to balance that with your projected revenue.
If numbers aren’t your forte, you can simplify the process by investing in software.
2. Apply for a line credit
You’re having trouble getting out of the red, so the last thing you want is to incur debt. Makes sense, right? Generally, yes. You don’t want to apply for a loan to pay for overhead or inventory, especially if the terms are unfavorable.
However, having a line of credit allows you some breathing room if you’re having cash flow problems. A line of credit is similar to a credit card in that you can withdraw a set amount of cash anytime you need it.
And unlike credit cards, there’s no pressure to use it. A line of credit just sits there, unused, until the circumstances call for an emergency injection of funds. While you still have to pay interest on your withdrawal, the rates are usually lower compared to loans and credit cards.
3. Communicate with your suppliers
As a business owner, you probably know what it feels like if your clients are late on their payments. That could lead to cash flow problems down the line because you still need to pay your suppliers and creditors.
If payments to suppliers and creditors are one of the main reasons why you’re experiencing cash flow problems, you might want to talk to them to renegotiate payment terms. If you have a good working relationship with your suppliers, they might agree to payment tranches or extensions.
These pointers will help you better manage your cash flow. Liquidity is essential for any business. Having enough cash reserves on hand allows you to maximize your opportunities and make informed decisions for the future of your business.