7 Smarter Ways to Never Run Out of Cash As A Business Owner
One of the top 4 Issues for small businesses of all sizes is cash flow. 60% of failed SMEs blamed their failure on cash flow.
Running out of cash is one of a small business owner’s biggest concerns, and unfortunately one of the most common. Another common misconception is that cash flow problems mainly impact failing businesses; nevertheless, cash flow problems may harm even thriving small businesses. It may even happen as a result of their success in some situations.
Table of contents
|1||What is Cash Flow?|
|2||Understanding the types of Cash Flow|
|3||What is the difference between Cash Flow and Profit?|
|4||How Cash Flows Are Different Than Revenues?|
|5||How to Never Run Out of Cash as a Business Owner?|
What is Cash Flow?
The net amount of cash and cash equivalents flowing into and out of a business is referred to as cash flow. Inflows are represented by cash received, whereas outflows are represented by money spent.
Cash flow can be positive or negative. A company with positive cash flow has more money coming in than it is spending. A company with negative cash flow has more money leaving than entering it, whereas a company with positive cash flow has more money entering than departing.
The potential of a business to create value for its shareholders is basically defined by its ability to produce positive cash flows or, more precisely, to maximize long-term free cash flow (CFC). FCF is the cash earned by a business from its normal business activities after deducting any money being spent on capital expenditures (CapEx).
A company’s cash flow is the amount of money that comes in and goes out. Businesses earn money from sales and spend money on expenditures. They may also get revenue through investments, royalties, and licensing agreements, as well as offer things on credit with the expectation of receiving the money owing at a later period.
Positive cash flow implies that a company’s liquid assets are growing, allowing it to pay liabilities, reinvest in its business, meet any obligations, and build a buffer against potential financial difficulties.
Understanding the types of Cash Flow
Cash flow can broadly be categorized as (1.) Cash flow from operations (CFO) (2.) Cash flow from Financing (CFF)and can further be categorized as (3.) Cash flow from Investing (CFI).
Cash flow from operations (CFO)
Cash flow from operations (CFO), also known as Operating cash flow, refers to money flows that are directly associated with the production and sale of items from routine activities. The CFO determines whether or not a firm has sufficient finances to pay its debts or operating expenditures.
In other words, for a firm to be financially viable in the long run, it must have more operating cash inflows than cash outflows.
Operating cash flow is computed by deducting cash received from sales from cash-paid operating costs for the period.
Cash flow from Financing (CFF)
Cash flows from financing (CFF), also known as financing cash flow, depicts the net cash flows utilized to fund the company and its capital. In simple terms it relates to how money is transferred between a business and its stakeholders, or creditors. It is basically the net cash available for corporate financing, which might come from dividends, loans, or equity.
Cash flow from Investing (CFI)
Cash flow from investing (CFI) or investing cash flow describes how much cash was earned or spent in a given time from various investment-related activities.
Negative cash flow from investing operations may be due to large capital investments in the company’s long-term health, such as research and development (R&D), and is not always a warning indication.
What is the difference between Cash Flow and Profit?
It isn’t uncommon for people to confuse profit and cash flow because they seem very similar. Remember that cash flow is the money that goes in and out of a business – it’s not the same as profit.
Profit, on the other hand, is used to explicitly quantify a company’s financial performance or the amount of money it makes overall. This is the amount of money left over after a company has paid off all of its debts. Profit is defined as what remains after deducting a company’s costs from its revenues.
How Cash Flows Are Different Than Revenues?
Cash flows are the net change in cash and cash equivalents over a specific period. The difference between cash flows and revenues is that revenue is the total amount of money that an organization has earned, while cash flow is the total amount of money that an organization has received & spent.
Revenue is an income statement item, which means it reflects how much profit or loss a company has made during a certain period. Cash flow, on the other hand, is not related to profitability but instead reflects how much money was generated or spent by a company during a certain period.
While revenue tells you how profitable your company’s business was in the past year, it doesn’t tell you if you’ll have enough money to pay your bills this month. When analyzing your company’s financial health, it’s important to look at both sources of income and expenditures because they are different ways of looking at what’s happening with your business financially.
How to Never Run Out of Cash as a Business Owner
1. Offer a variety of payment choices to customers
Are your customers paying you too slowly? If you work with bigger companies, they could be used to paying bills 30 or 60 days in advance. However, due to the fact that they must also consider their own finances, many small businesses are unable to wait this long for payment.
Customers are more likely to purchase a product when they have a variety of payment options. It gives them the feeling of control and flexibility in the purchase process. Offering a variety of payment choices will help your customers avoid the hassle of having to deal with a single payment method that they don’t like. Plus, it will allow you to attract new customers who may not have been willing to give your business a chance because they couldn’t pay with what they wanted.
To avoid running out of cash as you wait for slow payments, provide your customers a discount for making advance payments. For instance, a 2% discount can encourage customers to pay their bills sooner, improving cash flow.
Another option is invoice factoring, where in case a third-party factoring company would give your company a fee-based cash advance. The transaction is complete if the customer pays the entire invoice. This is a common strategy for improving cash flow and is typically used as a cash flow-positive revolving line of credit.
2. Diversify Your Client Base
One of the most important things for a business is to diversify their client base. This is because you are in a high risk zone if one of your customer generates major revenue let’s say 50% or more of your total sales.
There are a number of risk factors that come with relying too heavily on one customer. For example, if your customer is a small business and they go out of business, you will be left without any revenue.
The other problem with relying too heavily on one customer is that you may not be able to find another client in the same industry if the current customer goes out of business. This can leave you with no revenue until you find another company in the same industry to work for and generate enough revenue to cover your expenses.
It is important to diversify your client base by finding clients in different industries or by finding clients who want different kinds of services than what your current customers want.
Diversifying your client base is not just a way to reduce risk, it can also be a way to increase profit. If you have one customer that generates 50% of your total sales, it means that you are putting all of your eggs in one basket. If something happens to that customer, then you stand to lose a lot of money.
The risk factors can be anything from the company going out of business, the customer deciding not to renew an agreement or even if they have a change in leadership. And while this may seem like an unlikely scenario, it’s possible and has happened before.
Diversifying your customer base is a good way to reduce the risk of losing a big customer. It also helps to build more sales and marketing opportunities.
3. Construct a Cash Reserve
A cash reserve is a safety net for any company. It will ensure that the business can continue to operate in times of financial difficulty. A cash reserve is also an important tool for managing risk.
The cash reserve should be used as a last resort and only when it’s absolutely necessary. It should not be used to cover up poor financial management or as a way to spend more than what the company can afford.
A cash reserve is a fund maintained by a company to ensure it has the necessary funds to operate in the event of an emergency.
A cash reserve can come in handy when you need to cover unexpected expenses. It also gives you some breathing room if you find yourself short on cash, as you have time to discover a solution without having to take out loans or sell off assets.
It may seem at time that you are applying a break in your growth by setting aside money and applying it in further growth. However, the idea behind building a cash reserve is to have enough money on hand to cover any unexpected costs that may arise and keep the company running smoothly.
4. Master the Art of Upselling
Upselling is the process of selling a customer an additional product or service. It is a way to increase the transaction value without decreasing your revenue per transaction. The upsell can be either complementary or supplementary.
Complementary upsells are products that go well with the original purchase, like a TV stand for a new TV, or a suitcase for a new laptop. Supplementary upsells are products that don’t fit in with the original purchase but can still be beneficial to the customer and your business, like an extended warranty on any product.
In a simple terms Upselling is when a customer has finished with one product or service and you offer them another product or service at a higher price point in order for them to buy it from you.
Upselling can help you increase your revenue per transaction and per customer by increasing the average order value (AOV), which is one of many factors that contribute to higher conversion rates.
The art of upselling is not easy and requires careful planning and execution in order to get it right every time. There are various factors that affect how successful an upsell will be such as timing, product availability, price sensitivity and urgency. Also, There are many ways to upsell customers, but the most successful strategies are those that are tailored to your business.
Upselling can be done in many different ways, depending on what type of industry you’re in and what products or services you offer. For example, if you’re a restaurant owner, then there’s nothing wrong with suggesting an appetizer as an addition when somebody orders a main course.
5. Maintain Variable Costs
It is important to maintain variable costs in order to make sure that the business can maintain a steady profit. Variable costs are those that change with the amount of product or service being sold. For instance, if you have a cafe and it sells more coffee than usual, the cost of purchasing coffee beans will increase. If you are selling less coffee than usual, then your coffee bean cost will decrease.
The idea behind this is that if your company has a lot of variable costs, then when sales increase, so do your profits because you are spending less on fixed costs such as rent or utilities. When sales decrease, you are still able to cover your fixed costs because you have not had to spend as much on these items due to lower production.
One of the most important aspects of a business is keeping variable costs low. This can be done by ensuring that the supply chain is as lean as possible and that the company has a good understanding of its demand and how it will change over time.
The first step in managing variable costs is to identify which costs are variable, fixed, or semi-variable. Variable costs are those that change with production volume or sales. Fixed costs do not change with production volume or sales, but may vary depending on other factors such as inflation or interest rates. Semi-variable costs are those that vary with production volume but not sales, such as rent and utilities.
Once you have determined which type each cost falls under, you need to determine what percentage of your total budget each one comprises.
The next step is to identify opportunities for reducing these variable expenses and maintaining them at a level that will allow for profitability in the long run.
One example of maintaining variable cost could be adopting performance-based pay to reduce the amount of fixed overhead in your company. This allows you to control your cash flow and maintain variable costs. Performance-based pay is an essential component of a successful business. It helps you maintain variable costs and boosts your margins.
6. Borrow sensibly
As a small business owner you should always be thinking about the long-term prospects of your business and how you can secure additional funding might be one of your finest solutions if you are in a severe liquidity crunch.
Borrowing sensibly is an essential part of managing your cash. It is important to borrow what you need and not more. Borrowing sensibly will help you to avoid the interest charges and other fees that come with borrowing money.
Borrowing sensibly is a major component of financial stability. The term “borrowing sensibly” means borrowing in such a way that you can repay the loan and maintain your financial security.
The idea behind borrowing sensibly is to pay back what you owe and not put yourself in a worse position than before.
Before you start borrowing, it is important to get a clear understanding of what your options are and how each one will affect your finances.
When attempting to borrow sensibly, there are many things to consider. One of the most important considerations is how much you can afford to repay monthly and over what period of time.
Other things that you should do when borrowing money is to find out how much interest rates are going to be on the loan. If you are paying a high rate of interest, then it might be worth considering another option. The next thing that you should think about is whether or not there are penalties for paying off the loan early. If there are, then this might not be a good idea for your particular situation.
7. Re-negotiate contracts with suppliers and vendors
The contract is the foundation of a business relationship. It is important to review and negotiate contracts when they are signed with suppliers and vendors.
Negotiating a contract can be stressful and time-consuming, but it is worth it in the end. There are many ways to get started with this process, including negotiating on your own or hiring a professional to do it for you.
Contracts should be reviewed periodically because they can change as the company grows and changes. The terms of the initial contract may not be relevant anymore or may need to be updated due to new laws or regulations.
There can be many reasons why you should go back and review those initial contracts at this point, like:
- The market has changed and the vendor might be able to offer better rates.
- You might have been negotiating with the wrong person or department.
- The vendor might have updated their policies in the meantime and you need to make sure that your contract reflects these changes.
When you first started your company, you probably signed agreements with suppliers and vendors that were not much beneficial to you at the time as you might have agreed upon to your supplier/vendor’s outright just to start off immediately. However, as your company has grown, these agreements may no longer be advantageous for you. It is important to renegotiate these agreements to ensure that they are still beneficial for your company.
How Metadesk Can Assist You?
Metadesk is a business automation platform that helps you automate your accounting and mitigate your business risks. You can use Metadesk to create invoices, manage payments, and track your cash flow.
The Metadesk system is designed to be easy to use for both accounting professionals and non-accountants alike.
Metadesk is an all-in-one accounting software that provides a full suite of features and automation tools to help you manage your business.
Metadesk can help you automate your accounting and mitigate your business risks. Creating invoices becomes easier with Metadesk. You can also manage your inventory, purchase orders, and contracts in one place.
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