Cash flow is the lifeblood of any business. It is the movement of cash in and out of a business, and it is crucial for the survival and growth of a business. However, cash flow only becomes a problem when outflows exceed inflows.
Cash flow issues can arise from poor cost management, collection issues, and excess inventory or even overlooking miscellaneous costs. In this blog post, we will discuss how to optimise resources to prevent cash flow issues.
1. Identify costs accurately
By identifying costs accurately, you can ensure that you are not overspending on unnecessary expenses and are allocating resources effectively.
- Keep track of all expenses
- It's important to categorise expenses accurately to get a clear view of where your money is going.
- Conduct regular reviews of expenses to identify areas where costs can be reduced or eliminated
2. Develop sales forecasts and projections
Sales forecasts are critical for identifying not only costs but also inflows of sales. By forecasting sales, you can plan and allocate resources effectively, and reduce the risk of cash flow issues.
- Conduct market research to identify trends and patterns
- Regularly review and update your sales forecast and projections
- Analyse historical sales data to identify any unusual fluctuations
3. Identify business risks and prepare in advance
By identifying potential risks, you are better positioned to develop strategies that can mitigate their impact and reduce the risk of future cash flow issues. Conduct a risk assessment and establish emergency funds to give yourself a business buffer.
- Assess the likelihood and potential impact of each risk
- Establish emergency funds or contingency plans to cover unexpected expenses
- Conduct a risk assessment to identify potential risks that could impact your business
4. Separate personal funds from business funds
This is a common mistake made by new and smaller businesses. It can lead to cash flow distress without you realising it. It is important to keep personal and business finances separate and to ensure that there is a clear understanding of how much money is available for business operations.
- Avoid using personal funds to cover business expenses
- Establish clear policies for reimbursing personal expenses
- Maintain accurate records of all business transactions
- Avoid commingling personal and business assets
5. Monitoring inventory effectively
By monitoring inventory, you can avoid wastage and ensure that you have the right amount of inventory on hand to meet demand. This will reduce the risk of cash flow issues.
- Set minimum and maximum inventory levels for each product, and establish a reorder point that triggers a purchase order when inventory levels fall below a certain threshold
- Regularly review your pricing strategy to ensure that it is aligned with your inventory turnover and profitability goals
6. Always have a cash reserve buffer
Having a cash reserve buffer can help you weather unexpected expenses or fluctuations in cash flow. A good rule of thumb is to have at least three months of cash reserves on hand.
- Establish clear policies for managing your cash reserve, including guidelines for when and how to use it
- Avoid using your cash reserve for discretionary expenses or investments
- Maintain a cash reserve of at least three to six months' worth of operating expenses to help you weather unexpected downturns or emergencies
7. Identify early signs of cash flow issues
By reducing cash outflow and identifying fluctuations that will affect the business, you can take corrective action before the situation becomes critical.
- Monitor your accounts payable and receivable to ensure that you are managing your cash flow effectively
- Keep a close eye on your expenses, and look for ways to reduce costs or eliminate unnecessary expenses
8. Leverage short-term financing when needed
Short-term financing can provide a quick and effective solution to cash flow issues, ensuring that you have the resources you need to keep your business running smoothly.
- Identify the specific cash flow needs of your business, and evaluate the different types of short-term financing options available to you
- Identify the specific cash flow needs of your business, and evaluate the different types of short-term financing options available to you
- Determine how much financing you need, and create a detailed plan for how you will use the funds
- Use the funds wisely, and ensure that you are able to generate a return on investment that exceeds the cost of the financing
Conclusion
Optimising resources is critical to preventing cash flow issues. By effectively managing cash flow through the steps outlined above, you can ensure that your business has the necessary resources to not only survive but also thrive.
Looking to boost your business's cash on hand? With CardUp, you can make various types of payments using your credit card, including:
- Rent
- Payroll
- Supplier invoices
- Renovation
- Corporate tax
- and more...
Reach out to us today to learn more about how we can help you improve your cash on hand.
If you are in need of short-term financing, consider exploring options such as Funding Societies. They can provide a quick and reliable solution to cash flow issues, ensuring that you have the resources you need to keep your business running smoothly. To learn more about their financing solutions and how they can help your business, click here to learn more.
The above content is adapted from Funding Societies's webinar session at the CardUp's SME Healthweek 2023 webinar series: From Surviving to Thriving, tailored for SMEs and entrepreneurs covering all topic from finance, hr, marketing to globalisation.
