Healthy cash flow, the easy movement of money into and out of your business over time, is essential to your business operations. After all, cash flow is the lifeblood of every venture — from startups to small businesses. And it requires a careful eye and diligent planning at every stage of growth. Because positive cash flow feeds your business’s expansion, but negative cash flow restricts every opportunity.
In this article, we’ll take a look at the four pillars of healthy cash flow. By implementing these pillars in your own business, you can optimize your cash flow, improve your stability, and ensure smooth business operations for years to come.
These four pillars represent healthy cash flow management:
Cash flow pillar #1: Smart product pricing
Effective pricing strategies are a cornerstone of healthy cash flow management. Your prices are your first chance to manage incoming cash, meet your financial goals and cover your essential expenses.
Smart product pricing requires you to research market demand, your competitors’ pricing, and the perceived value of your product or service. Once you understand how popular your offering is likely to be, how your competitors position their alternatives, and what your customers may be willing to pay, you can determine a set of prices that maximize your revenue and optimize your cash flow.
There are dozens of pricing strategies businesses can use to increase their revenue without hurting demand. And because the best price isn’t necessarily the highest price, it’s important to think strategically about how your price compares to other competitors.
Cash flow pillar #2: Strategic product and inventory management
The next marker of healthy cash flow is your ability to manage your products and inventory levels. With a strategic management system in place, you can avoid overstocking or understocking your shelves, wasting materials, and disappointing customers with lengthy backorder delays.
Here are a few ways you can improve your business’ inventory management — and cash flow:
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Closely track your demand cycles. Analyze your sales data to determine when you’ll need more inventory on hand for the busy season, or can afford to order fewer products during slower months.
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Streamline your product offerings. Multiple product variations and lines can raise your production and inventory costs. But by standardizing what you manufacture or sell, you have the opportunity to benefit from bulk ordering discounts and faster inventory turnovers.
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Strengthen your supplier relationships. Look for ways to negotiate more favorable terms with your suppliers, like volume purchase discounts, extended payment terms, and faster production.
By reducing how much time you spend holding unsold inventory, and how much revenue you put towards production and stocking, you can quickly improve your business’s cash flow and bottom-line profitability.
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Cash flow pillar #3: Flexible payment terms
Maintaining a healthy cash flow requires more than just increasing your revenue and reducing your expenses. It also means taking every opportunity to increase the length of time you hold onto the cash that moves through your business.
For example, if your rent bill is due on the 5th of every month, but your main source of revenue doesn’t come in until the 15th of every month, you may have a successful business, but negative cash flow — and a major problem.
To free your cash flow and improve your business’ health, try:
- Negotiating longer payment terms with your suppliers, so you can keep more cash in business.
- Offering multiple payment options to your customers, like a discount for immediate payments or simple installment plans that keep cash coming in.
- Tightening your credit policies so your accounts receivable balance decreases.
While these cash flow improvement strategies may not work for every business, implementing just one or two payment policies can help your business avoid cash flow complications and keep more options open.
Cash flow pillar #4: Organized reporting
Organized reporting is the final key pillar of maintaining a healthy cash flow. Effective reporting gives your team valuable insights into your company’s current situation, and helps you stay on top of your financial health.
One way to gather the data you need to make smart cash flow decisions is to create a well-structured cash flow statement. This statement outlines all the inflows and outflows of cash within your business, categorizing them into operating activities, investment activities and financing activities. By pulling this snapshot report frequently, you can closely monitor your current cash flow and available funds — before you overdraw one area of your business.
Several Financial Planning & Analysis (FP&A) tools make cash flow monitoring simple. These tools can automate your calculations, generate accurate financial statements, and even provide real-time visibility into your financial standing.
To improve your cash flow reporting efforts, you can also outsource your essential financial activities to a professional team. Not only can outsourcing improve the accuracy of your most important reports, you can gain access to the professional insights you need to make meaningful cash flow improvements — and generate greater growth.
With these four pillars in mind, small business owners can avoid crippling cash flow problems
Managing your small business’s cash flow requires a proactive approach and a clear focus on pricing, inventory, expenses and financial reports. But with a dedicated cash flow strategy in place, based on these four pillars, your business can be well-equipped to navigate financial challenges with ease.
Want more? Escalon has helped over 5,000 companies across a range of industries to optimize routine business functions, like taxes, accounting and HR. Talk to an expert today.
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.
