What Is Cash Flow and Why Does It Matter?
Cash flow is one of the most important aspects of business, standing right there alongside providing great customer service and offering a quality product. According to the Small Business Association having an inadequate reserve of money is one of the top reasons that small businesses fail.
So why is the flow of cash in and out of your business so important? First, let’s take a moment to consider what cash flow really means. Cash flow is a term used to describe the movement of money into, and out of, your business accounts. When you are at a positive cash flow, you have more money coming in than there is going out. This happens when costs are low, contracts are plentiful, and everything is going well. A negative cash flow, on the other hand, happens when more money is being spent than is being taken in. This happens when unexpected bills arise, business is slow, or other circumstances occur that cause income to go down or the cost of business to go up.
Cash flow is so important that most accounting software includes a cash flow statement, and accountants are almost guaranteed to bring it up during meetings.
What can businesses do to maintain a positive cash flow?
While there is no one-size-fits-all answer, here are some tips and tricks for maintaining a positive cash flow and keeping your business on track.
Balance the books
Pay close attention to the money coming into and going out of your business. Don’t ignore the checkbook until taxes are due, but instead take time to regularly review the numbers. This will make you more aware of your cash flow and give you a better sense of where the money is going. When you notice unnecessary expenses, you’ll have an opportunity to eliminate them before they’ve eaten up hundreds of dollars.
Sell at a profit
Know how much it costs to provide your product or service, then charge enough to cover those costs with a little extra as profit. Breaking even, or selling at a loss, can be a great tool when you are establishing yourself or trying to pull customers away from your competition, but it is not sustainable long term.
Add on services
Watch for opportunities to sell additional products or services. If you are cleaning a carpet, offer to clean the upholstery as well. Selling a basketball hoop? Sell the basketball that goes with it. These services can be bundled together as packages, or offered on the job. Either way, you are increasing your cash flow and creating additional profits.
Encourage repeat business
Marketing professionals worldwide will tell you how much easier it is to keep an existing customer than it is to attract a new one. Retaining the customers you have through high quality service, products, and experiences is one of the best ways to grow your cash flow over time. Customers who have used your services in the past are much easier to contract with again, creating repeat business and a steadily rising cash flow.
Keep cash available
This may be difficult to do as a new business owner, or when really pushing your business to grow into the next stage, but experts recommend keeping 10 percent to 20 percent of your monthly revenue on hand at all times. That way, should something unexpected happen you have enough money to get the business through hard times.
For additional tips and tricks for keeping cash flow positive, we recommend consulting your accountant or tax professional. These highly skilled individuals can assist you with a cash flow analysis, break even analysis, and more.