How to Manage Cash Flow in Business

Achieving retail business success hinges on the ability to sustain robust cash flows. Surprisingly, the practice of sound cash flow management remains uncommon among many businesses, with more than 90% of SMEs encountering at least one cash crunch each year. 

A company experiencing negative cash flow encounters significant liquidity challenges. That includes the inability to meet debt obligations and cover essential expenses like payroll, rent, and operational costs. 

A study by Intuit posits that one-third of small businesses struggle to make interest payments due to cash flow issues. 

In light of this, it's essential for every brick and mortar retailer to effectively oversee their cash flow in business, ensuring efficient operations and maintaining the necessary financial stability.

Generate Cash Flow Predictions

Cash flow predictions act as a proactive alert system for potential cash shortages. To craft a cash flow projection, begin by analyzing historical cash flow patterns while considering significant expenditures, periods of sluggish sales, and unforeseen costs.

Be attentive to business-related uncertainties like order cancellations, delayed payments, and broader economic deceleration. 

Accomplish this through scenario analysis employing tools like Excel templates or specialized accounting software.

Creating Cash Flow Statements

Maintaining vigilant financial reporting is crucial for monitoring your business's cash position. 

After projecting cash flow, generate cash flow statements that provide a clear picture of the actual cash inflows and outflows. 

These statements can be prepared using two approaches: the direct method and the indirect method.

The direct method straightforwardly records the disparity between cash received and cash disbursed. 

The indirect method adjusts net income to compute the final cash balance. 

The latter is more commonly employed as it aligns with the accrual method of accounting and comprehensively tracks cash generated from operating activities, financing activities, and investing activities.

Examine Discrepancies

The fundamental objective behind constructing a cash flow forecast lies in the evaluation of variances between projected and actual financial performance. 

Where significant disparities arise, organizations have the opportunity to scrutinize the source of such. It could be the discrepancies stem from flawed projections or suboptimal cash management practices. 

In the latter scenario, businesses can implement corrective actions aimed at enhancing their cash inflow. They can expedite accounts receivable collection, reduce expenses, or even consider a preemptive loan acquisition to prevent impending financial challenges.

Establishing a regular monitoring regimen for cash balances, conducted on either a weekly or monthly basis, is a prudent approach. This practice serves to ensure that actual cash flows and the initially projected forecast are consistent and a great strategy on how to manage cash flow in business.

Set Up a Dedicated Business Bank Account

Many business owners fund their ventures themselves initially. Yet, complications arise when personal and business expenditures become entangled. 

To improve cash flow management effectively, establish a separate bank account exclusively for your business.

This approach allows for meticulous tracking of your business expenses and the flexibility to utilize overdraft facilities when required. 

Banks often provide specialized services for their business clientele. To enhance your financial management even more, contemplate acquiring a business credit card and making use of the monthly management reports to streamline procurement.

Build A Cash Buffer

A cash buffer represents the sum earmarked by your business to cover unforeseen expenses and ensure consistent cash flow. 

A study conducted by Harvard Business Review revealed that businesses with less than two months' worth of cash on hand as a buffer often encountered significant challenges in sustaining their operations.

You can fortify your cash buffer through prudent saving practices, financial redirection, and the consistent allocation of a portion of your revenue. 

If you're in the initial stages of your business journey, consider inaugurating a dedicated bank account specifically for your cash reserves and regularly deposit a predetermined amount into this account on a monthly basis.

This is another way on how to manage cash flow in business.

Scrutinize your accounts payable, trim any excessive expenditure, and establish a monthly savings target. 

Streamline the process by setting up a direct deposit mechanism that automatically funnels a portion of your earnings into your reserve.

Should you notice your cash buffer depleting rapidly, evaluate whether specific expenses can be temporarily halted until your cash buffer reaches the preset threshold. 

At this point, you can resume them. Explore options for liquidating funds tied up in aging assets and accelerate inventory turnover. 

Moreover, aim to sell your products before their value experiences further depreciation.

A robust cash buffer serves as a crucial lifeline during challenging phases of your business, enabling survival during tough times and providing the means for seizing new growth opportunities. 

Constructing and maintaining one demands unwavering dedication and astute financial planning.

Secure Financing Proactively

The opportune moment to address cash flow concerns is prior to their emergence. If your business is operating smoothly or is in its initial production phases, this is the ideal time to consider borrowing funds. 

By establishing a business line of credit while your financial metrics are favorable, you can preempt the risk of future loan rejections. 

This proactive step also ensures you have resources at your disposal in case you encounter any growth-related challenges inherent to a business. 

If you haven't yet opened any credit cards and are struggling to secure a loan, consider obtaining a small business credit card with an interest-free grace period to fulfill your short-term financing requirements. 

Credit cards can not only serve as financial tools but also unveil opportunities for cost savings. Many of these cards offer innovative reporting features that visually depict spending patterns, aiding business owners in cash flow optimization and are a great tip on how to manage cash flow in business.

Understand Your Break-Even Point

Every small business owner inevitably asks, "When will I start making a profit?" Instead of pondering this, establish a practical target for when you aim to achieve your break-even point. 

This proactive approach will enable you to understand how to manage cash flow in business, concentrate your efforts and establish a concrete milestone for forecasting your cash flow in the immediate future.

Remember that cash flow management is not a one-size-fits-all approach. 

Small business cash flow problems require attention and adaptation to your business's unique circumstances. 

Are you struggling with your business cash flows or do you wish to improve the financial stability of your retail business? 

Book a call with me for help today.