A US Bank study indicated that approximately 82% of collapsed businesses cited cash flow problems as a significant cause of their failure.
The main purpose of most businesses is to make money, so it’s natural that cash flow is paramount.
Businesses also need to think of ways to minimize any risk.
Below, we’ll share our top tips to help with cash flow and protect your business from financial loss.
Diversify your revenue streams
Relying on a single source of income can be risky. Consider diversifying your product or service offerings to reach different customer segments or markets. This can help stabilize your cash flow in case one revenue stream experiences a downturn.
Establish a realistic cash flow forecast
Create a detailed cash flow forecast to anticipate and plan for fluctuations in your finances. This helps you identify potential cash shortages and allows you to take corrective actions in advance.
A cash flow forecast is a vital tool for your business because it will tell you if you’ll have enough cash to run the business or expand it.
Cash flow management also helps you to prevent insolvency by delaying an investment or liquidating some assets.
When planning a cash flow forecast, you can decide how far out you wish to plan for. This may range from a few weeks to several months.
The trick here is to choose a duration you can accurately predict.
The next step is listing all incoming cash for the week or month, depending on your forecast. This includes sales, grants, tax refunds, royalties, shareholder investments, and so on.
Then list your outgoings such as salaries, rent, assets, raw materials, loans, tax bills, marketing costs, etc.
This way, you can determine if you have a positive or negative cash flow.
Track your expenses
Although losing track of your expenses is easy, this can affect your cash flow in the long run.
You risk hurting your business finances if your profits are relatively lower than your costs.
If left unchecked, you can quickly run out of resources to fund your business operations, pay your workers, and cater to other needs.
Moreover, allocating funds, simplifying tax processes, and streamlining bookkeeping practices is easier. Fortunately, you can track your expenses with the right steps. Experts recommend separating your personal and business accounts to avoid the risks of your regular expenses affecting your business.
Likewise, you can easily record and track your company costs with a business bank account, so keep this in mind.
You should also familiarize yourself with business expenses and the best tracking methods. For instance, if you run a food business, you can leverage this helpful resource: “Restaurant payroll: The ultimate guide for business owners,” to effectively monitor how much you spend on your employees and how it affects your finances. Recording every transaction is important, saving every receipt for future reference. Leveraging technology to manage your business expenses is also beneficial.
Eliminate unnecessary costs
When monitoring your business expenses, you can stumble upon certain redundant or unnecessary costs that are siphoning your funds.
For instance, you can disconnect your traditional phone lines if you have a more efficient way to speak to suppliers and customers. Likewise, you can go paperless to avoid spending on ink, postage supplies, staplers, staple pins, paper, and other items. Going paperless is also eco-friendly and sustainable, so feel free to consider this.
Create an emergency fund for your business
Build an emergency fund to cover unexpected expenses or revenue shortfalls. Having cash reserves can help you weather economic downturns without resorting to debt or drastic cost-cutting measures.
Unplanned expenses can spring up at any time. This could come as malfunctioning equipment, sudden legal fees, tax bills, natural disasters, etc.
Being unprepared for these situations can be detrimental to your business. You may have to use business resources, derailing your business operations.
Moreover, an opportunity for business growth can come at any time, and not being financially prepared can cause your business to lose out. Therefore, having an emergency fund to address these situations is expedient.
Work with professionals to make sure contracts are legally binding and risks minimized
Consult with financial advisors, accountants, or business consultants to get expert advice on risk management and cash flow improvement strategies tailored to your specific situation.
Hire specialists who can help you develop contingency plans for various risk scenarios, such as economic downturns, natural disasters, or supply chain disruptions.
When entering into contracts or agreements, carefully review the terms and conditions. Ensure that they are favorable to your business and do not expose you to unnecessary risks.
Contracts protect your business and define terms and conditions for your employees, suppliers, clients, or investors. Make sure your contracts are legally binding and governed by law by hiring a lawyer to confirm them.
This will ensure that all parties have to pay you for your services or face legal action.
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