New business owners often ask about cash flow what it is and why it’s essential. The short answer here is: cash flow is the amount of money that is coming into a business and going out of it. The goal is to have more coming in than is going out.
The cash inflow
Cash inflow is the blood of your business, and it will come from payments from your customers, monetary infusion from an investor, receipt of a loan and any interest on savings or investments.
Cash inflow is essential, as later on, it will become the payment for things that you need to make the business run. Anything from employees, rent, operating costs and stock all cost money, and positive cash flow is best. If the cash inflow is positive, then it means your business is running well. Having a high positive cash flow will allow you to make investments, open another location and grow your business. On the negative side if you are paying out more money than what you have coming in that is called negative cash flow.
Especially with the way the economy is going, people are always looking to hold on to their money for as long as possible. It makes business sense to delay payment as long as possible anyway.
How can you improve your incoming cash flow?
If you invoice customers and they have a significant time frame to pay you this can make your planning hard. However, there are ways that you can encourage your clients to pay their bills faster.
Start by issuing the invoices promptly and follow up often. While it may sound simple, people tend to put off paying others all because they don’t want to part with their money. You can offer a discount if they make an early payment. Such as if the contract states a thirty-day term consider giving them a small discount for a ten to fifteen-day payment.
Structure the payment around the upfront deposit or, if the project is a long one, schedule the payment intervals over the whole project lifetime. This can ensure that you have some cash coming in the door every so often.
How to survive the leaner months
There can sometimes be a lag between the sale and when you get the receipt of payment. However, the bills are not going to disappear, and the debtors are not going to offer you an extension because you have failed to make payment. You need to make sure you have enough cash to make it last through the leaner months when there is just no flow.
You can build up some cash reserves to avoid this problem. Look over your cash flow history and come to a reserve estimate that can cover your business for a certain amount of time such as three to six months. You can have a line of credit with your financial institution. Most banks will be happy to offer an overdraft for their valued customers. There are also options for short-term financing, there is always an option.
If you are embarking on a new mission, which you are positive will bring revenue tenfold; another option is venture capital. This is provided by trusting investors who would like to help you out by getting your product off the ground. You can read more on venture capital.
It is essential to not be silly with everything like buying things that you don’t necessarily need until you get the cash flow in. Always try to be ahead in things like your bills so if you are struggling through a tough time then that is one less thing you don’t need to be worrying about.