Small businesses navigate through the peaks and valleys of the incessant changes in the economies globally. Hence, managing cash flows is pivotal to meet the daily financial needs of the company. Unlike large corporations, small businesses often lack significant cash reserves to weather constantly changing markets. One wrong move – you are out in the rain with a heap of debt bills and bankruptcy notice.
So, what’s the end-to-end solution for small businesses to achieve financial stability amid economic downturns?This article shares 5 smart ways to optimize cash flow for small businesses.
Cash Flow Optimization for Small Businesses
Cash flow is the heart and soul of every business. The inflow and outflow of small businesses’ cash flow are limited in nature, especially considering the size of the entity and the operations they perform. Some of the external factors that negatively impact small businesses include inflation, recession, interest rates, government policies, and other economic & cultural imbalances. So, if you are a small business firm looking for ways and means to up your finance game, then all you need is a strategic cash flow optimization system. From streamlining transactions to monitoring to forecasting cash flows, this approach enables small businesses to manage their funds effectively.
Significance of Cash Flow Optimization for Small Businesses
Cash flow optimization is a core operation for small businesses to channel their finances in the right direction. Optimizing cash flows allows businesses to get better leads, attain higher profits, and generate extra revenue. As per the Reserve Bank of Australia reports, the borrowing costs and lending risk to SMEs (Small & Medium Enterprises) are directly linked to each other. The report further said that cash buffers for small businesses were higher during the pandemic stage, which allowed them to carry their operations smoothly. But woefully, the average cash buffer values started to decline post-pandemic, subsequently posing a serious threat for some small businesses to last for long.
Large businesses don’t encounter a sea of changes in the revenue growth annually, which is otherwise for small businesses due to poor cash flow optimization. According to a research report, 60% of Small and Medium Businesses (SMBs) fail due to ineffective cash flow management and over 25% of SMBs experienced invoice issues.
Here, we have outlined the list of reasons explaining why to optimize cash flow for small businesses.
- Business Liquidity: Injecting cash into the businesses is as important as managing the existing cash flows. Small businesses typically have less cash reserves so this indicates lower liquidity levels as opposed to large corporations. Amid economic fluctuations, lack of liquidity fails small businesses to meet their day-to-day financial obligations such as paying wages, office supplies and utilities, operational expenses, etc. With Cash flow optimization in place, the businesses will know the cash buffer values, ensuring that they have adequate funds in the reserve to cover the operational expenses of the business.
- Creates Fresh Possibilities: Every company starts their operations with a “going concern concept”, where they expect to carry their business perpetually for a long-term. If small firms want to expand their business, they need to have enough cash flow in hand. The source of investment can be internally or externally, depending on the type of business operations. Expansion unlocks newer opportunities in various markets, creates awareness about the products and services of the business and builds brand recognition. Large corporations can raise money through IPOs, debt financing, loans, etc. But small businesses can’t do the same due to less liquidity and frequent revenue changes triggered by external and internal factors. Implementing right cash flow optimization practices augments profits of the company, allowing small businesses to reinvest them in expansion projects. This diversification sets off other losses in the business, if any.
- Solid Financial Foundation: The surge in digitization paved the way for small businesses to unlock unique opportunities, create innovative products, offer special services, and much more. Strong cash flow optimization techniques enable small businesses to not only just fulfill their operational needs, but also build a solid financial foundation for long-term success.
- Building Supplier and Customer Relationships: Generally, businesses fall into debt trap due to lack of proper cash flow management and poor strategies. This obstructs free flow of funds, creating blocks for timely payment of supplier bills and operational expenses. Cash flow optimization alleviates such problems by offering flexible payment options and alternative channels for credit management. If your business wants to enhance supplier and customer relationships, deliver them what was promised. Track your sales regularly, make swift payments to avoid penalties or large charges, and build customer loyalty by offering quality products and personalized services. By being genuine and transparent, small businesses can only retain old suppliers and customers but also bolsters productive partnerships.
5 Smart Ways to Optimize Cash Flow for Small Businesses
Small businesses obtain capital through both self-financing and borrowing. If the latter value is more than the former, then it’s a sign that the company is going down the rabbit hole. To avoid this situation, here are the 5 smart ways to optimize cash flow for small businesses.
- Prepare Custom Cash Flow Worksheet: Data is like gold for every business. It consists of crucial information about customers, suppliers, vendors, and financial details of the company. Now, keeping track of all the cash flow activities of the business can certainly be a tedious task. If this process is done manually, the margin of human error can be incontestably huge. So, what’s the solution for this issue? Well, prepare a custom cash flow worksheet and integrate the software to the existing data. This system allows you to track every financial aspect and aid you in making informed business and investing decisions. Case-in-point, your business wants additional capital to finish an ongoing project or you are perplexed as to whether you should go for debt financing or short-term loan or self-financing for future investments. Custom cash flow worksheet exhibits everything you need to know – from sales to capital available. At the end of the financial year, or say, every month, you’ll know the accurate balance in the company’s bank account.
- Using Past Performance Data: If you know what went wrong in your past, you wouldn’t commit the same mistakes in the present. This goes the same for businesses too. Historical data allows you to dive into the specifics of expenses and sales cycles, helps you learn about past trends and compare it with the present market patterns, etc. The past data paints the cash flow picture of inflows and outflows. This gives a gist of how the business managed their cash flows. By taking past performance data as reference, small businesses can prepare a future cash flow statement, allowing them to stay ahead of the game.
- Building Cash Reserves for the Future: Businesses go through various unexpected expenses from time to time. While automation of cash flows through payment solutions unchain businesses from complex math, it does not solve the cash shortage problem. No business is certain about what comes knocking at their door. So, the best step forward for small businesses is to build cash reserves that could make a huge difference in the long-run, especially considering the fluctuating revenue they make each year. For some startups, it takes a year or two to generate profits or hit breakeven, and a few would end up stony broke before they even kickstart their leading business. Cash flow optimization tool creates a mechanism where a portion of a business’s profits gets transferred into the cash reserve account either monthly or annually. Using the right accounting software aids small businesses flourish and reach newer heights. You can create collection schedules, add payment remainders, align sales, automate billing systems and savings, etc. This helps small businesses know the available share in their bank account and how much profits they need to reinvest in the business. If the uncertainty is beyond company’s expectations, the cash reserves will come in handy to rescue the business.
- Simplify Invoicing and Payments: Small businesses should be quick on their feet and thinking when it comes to collections and payments. Cash flow forecasting provides the data of when the business will have cash inflows. Once the business understands the cash flow cycles, it’s easy to streamline payments and invoices and keep track of monthly or yearly collections. Optimize cash flow for small businesses by using the right financial and accounting software and assimilate with the existing business data. So, when a sale is made, the software generates the invoice instantly and sends it to the respective customer. Cash flow optimization reduces human errors, delay in invoice processing, employee cost, and other indirect expenses for the business.
- Invoice Factoring for Easy Returns: Poor invoicing and payment cycles, surging debt, improper cash flow tracking – all these aspects will hurt your business as well the year end profits. So, the alternative way to optimize cash flow for small businesses is by invoice factoring. So, what’s the process? It’s pretty easy. The company can sell their accounts receivables to a factoring company in return for quick cash. The factoring company discounts the receivables as a sort of commission and pays the remaining cash. For instance, your accounts receivables are $100,000 and the factoring company charges 10% on the bill amount as commission. The end value you’d receive after commission would be $90,000. While you may lose a certain share of your accounts receivable value, you won’t have to wait in the queue for weeks or months to get your payments. However, the factoring commission differs from company to company and the line of business you are into.
Conclusion
Cash flow optimization helps small businesses easily navigate through tough situations. This accounting practice improves the liquidity of the company, cuts down extra costs, trims debt risks, and boosts profits of the business. Moreover, optimizing cash flow for small businesses adds a layer of trust, strengthening the ties with vendors and customers, and aids in making informed business decisions. So, what are you waiting for? Incorporate these actionable tips and watch your company thrive in any market condition.