Cashflow Tips for Small Businesses

01 June 2020

As a small business owner, you’ll already know that ‘cash is king’. Whether your business is currently thriving or beginning to struggle, knowing how to manage your finances is essential in ensuring that your business survives. The shocking reality is that more than 60% of failing businesses are still profitable – they just simply ran out of cash. Failure to adequately manage cash flow has led to their downfall. 

If the financial aspects of business elude you, here’s a really simple explanation of cash flow. Cash flow is basically the total amount of money being transferred in and out of your business,  affecting its liquidity. If your business has a positive cash flow, this means that the money coming in from clients and customers supersedes the amount going out to pay for expenses. However, if you’re outgoings equate to more than your incomings, problems may well be lurking on the horizon.

To help you better manage your business’ cash flow, here are a few useful tips to follow. Once you know what area’s to start paying attention to, it’s easier to reign in expenditure and bring your small business back from the brink of collapse.

Review your costs

The very first thing you’ll want to do is review your operational costs. In order to get ahead of your competitors, it is important that you think of efficient ways to improve these. Operational costs are key component features of any small business; they are necessary costs of the day-to-day running and maintenance. Review your costs

Examples of these operational costs include:

  • Wages and salaries of employees;
  • Marketing and advertising;
  • Office supplies and stock;
  • Business insurance costs;
  • Maintenance costs;
  • Legal and accounting fees.

The list goes on. Each of these is directly linked to the production of goods and services that your business provides. A question that you might have as a business owner is ‘how can I reduce operational costs without losing the quality of the goods or services that my company provides?’.

Here are some ways in which you can cut down on your operational costs – without sacrificing the quality of your goods and services being provided.

Look for better rates

This point is relevant for business owners who work with vendors on a regular basis. In such cases, you may want to consider implementing a bidding system for work assignments and projects. Say for instance you have five different vendors who are all pitching at different rates; pit them against each other until you have successfully managed to bring the prices down.

Scrap unused services

Do you have a service that you have not used in a couple of months? This could be a manufacturer, a little-used vendor or a transport company. Consider cancelling any service that costs more than it returns. If it’s something you feel you need but can’t really afford,  shop around for cheaper alternatives. Basically, cancel any services that are no longer serving your business’ financial goals and don’t be afraid to downgrade those that do when times get tough.

Go green

Going green might seem like a modern-day trend – but it really can save you some much-needed cash. Reduce energy costs by switching to low wattage LED lights instead of regular lighting. LED lights typically last for an average of 50,000 hours (17 years) vs the 5,000 hours (half a year) that fluorescent lights do. They also use 75% less energy than incandescent bulbs.

It’s also a good idea to see if your business is eligible for solar panel funding. If it is, you can sell back excess energy to the provider, generating additional income. Contact your energy provider and see if they have any green offers or off-peak saving plans. These may all seem like small fry in the bigger scheme of things. But ultimately, it all adds up to savings.

Financial projections

Financial projections are forecasts of your future revenues and expenditures, which take into account your existing or estimated financial data. Think of them as being ‘forward-looking’ statements. In most cases they will include possible scenarios, taking into consideration predictions of external factors, such as how one situation may impact your business financially. 

In essence, a cash flow forecast is a key tool in identifying possible shortfalls in cash balances, early on. They estimate the impact change has on your business. Can the business afford to pay for supplies and employees? A cash flow forecast should be able to determine that. The aim is to avoid having to pay your employees late or losing suppliers. As a business owner, you should be forecasting and revising your cash flow on a daily basis.  Especially if the noose is starting to tighten.

Separate Business from Personal

A common trap that most business owners fall victim to is the failure to separate personal bank accounts with those of the business. As much as this mistake is common, it is also understandable, especially when taking into consideration that most of the financing of small businesses comes from the owner’s personal savings.

In order to better manage your cash flow, you need a separate bank account strictly for your business. Banks will give you the option to have a credit or debit card for your business’ purchases. In addition, banks might provide you with management reports that outline the purchases made by your business. This then allows you to keep track of your business’ financial performance.

However, it’s important to remember that banks are also notorious for being the downfall of many small businesses. Having a business account with them is one thing, but relying on them to help you in your time of need is another. As soon as your business starts making a loss, banks view you as a risk – withdrawing financial lifelines and even demanding full repayment of any outstanding debts.  If separating your funds is something you struggle with, as many do, then it may be time to call in the help of a professional.

Shop around for insurance

Starting and owning a business comes with its own inherent risks, and as a business owner, you are exposed to these. It only takes one lawsuit or catastrophe to completely wipe out everything you have worked so hard to achieve. Having the right insurance can help a business in dealing with financial consequences from a potential threat. There are a number of types of insurance your business can get including:

Professional liability insurance

This type of insurance covers the business against negligence due to harm that comes from mistakes or failure to adequately perform

Property insurance

In cases of theft, fire, or a storm, the insurance will cover equipment, signage, furniture, and inventory.

Business owner insurance

This insurance protects the business owner against loss of income. The insurer will pay the business income that would have been made while closed down. It also compensates for normal operating expenses of the business such as rent, wages, other utilities, etc.

Have a cash reserve for a rainy day

Yes, your business needs emergency funds. These funds are put away in a reserve to offer aid for ‘rainy days’. Think of them as a safety net that will see you through times of financial drought. They are vital in situations where the business comes across unexpected expenses or any other financial obstacle that is unplanned. The recent COVID-19 pandemic has served to highlight the need for a safety net. Even large corporations and international giants aren’t immune. Virgin Atlantic failed to set aside enough of a reserve from its healthy profits to see it through, resulting in shares needing to be sold off to help keep it afloat.

Reserve funds allow your business to operate during times of emergencies. They make it possible for your business to continue providing services, cover expenses, make purchases of supplies and make payroll. It’s a sad yet avoidable truth that the majority of businesses fail due to a lack of preparation for uncertain times. Your company might be insured against property damages, inventory theft, equipment repairs, and product loss, but processing insurance claims take time. And it can take even longer before you’re able to get your hands on the cash needed to cover the damages. Be savvy and set aside some ‘personal insurance’ to avoid being taken down by external consequences.

Don’t be afraid to ask professional for help

Unless you are adept at accounting, planning, forecasting and implementation, a professional advisory service, such as Magnolia Advisory could help save your small business a tremendous amount of time while reducing accounting errors and dependence on additional resources.

Our highly-experienced team of industry-leading experts can help you navigate the complex, and, sometimes soul-destroying maze of small business ownership. While it’s true that outsourcing is another cost to think about, professional knowledge and understanding combined with an awareness of the best strategies to implement can not only save you cash in the long-term, it could save your business too.