Cash Flow Is Vital
It is a rare company owner that has no concerns about money. Above all, management of cash flow is vital. Starting a business means you are responsible for your company’s success. After that, you are the person who ensures your employees can afford to put food on the table. In addition, you must prepare for the unexpected.
With money being of such vital importance, you must control the finances of your business. Cash flow management is how you do this. We have highlighted three ways you can manage cash flow.
Security: it is about protecting your business in its early stages
Cash flow management is perhaps the most critical aspect of business finances. In other words, it is all about ensuring your incoming cash and outgoing expenses are balanced. Similarly, your goal is to make sure your company is not spending more money than the business is making.
Get this wrong, and your business will not survive, no matter how good its products or services are. Claiming business survivability is not scaremongering. As this article explains, poor cash flow management is why 82% of small businesses fail within their first five years.
In addition, there are some other reasons companies fail before their sixth birthday:
- 79%: not having enough money to start with
- 77%: poor pricing (covers products but can also relate to salaries)
- 73%: over-optimism when it comes to sales targets
As these numbers show, cash flow management is a matter of life or death for small businesses. The basic principle is making sure you have enough available cash to keep your company afloat. It would be best if you built a cash reserve. How much? Some experts recommend having three months of expenses. Others recommend six months. I would suggest speaking to your CPA or financial adviser to determine the correct amount for your business. The following two sections of the article explain how you can have cash in the long and short term.
Long-term: loans give you capital to invest in tangible assets
Nearly eight out of 10 startups fail because they do not have sufficient capital from the outset. There are many reasons for this, but there is no doubt a key reason is those founders do not want to start in debt. Similarly, they probably did not have cash sitting idle in their personal bank accounts.
This blog post states that 73% (just 9% lower than the number that fails within five years) of small businesses prefer to forgo growth than commit to borrowing. In addition, there is guidance like Profit First from Mike Michalowicz suggesting ways to manage your business while minimizing borrowing.
Let us make one thing clear: companies need to grow if they are going to survive. Growth is never more critical than at the early stages. Loans can help your business to grow because they free up capital to invest in tangible assets. Tangible assets mean getting an office if needed, purchasing office equipment, or securing vital machinery.
There are two primary types of business loans your company can get:
- Government grants: the U.S. and Canadian governments have a range of finance programs for new businesses, with the interest rates often lower than private banks.
- Bank loans: private financial institutions have a broad selection of loans available for startups, with the borrowing amount generally higher than state-run schemes.
Obtaining loans can be a sensible way of using cash flow management to grow your business at a vital stage in its existence, done sensibly. Therefore, review if a loan can take your company to the next level. After that, make a business case for getting a government grant or bank loan.
Short-term: business cards let you buy now and pay later
You have been on a cash flow journey in this article already. We highlighted that cash flow is the biggest reason companies do not last more than half a decade. After that, we showed a correlation between cash flow and the number of businesses that do not borrow.
Similarly, we now expand your cash flow tools further. It would help if you used sensible lending to advance your company while it finds its feet. In other words, we highlight how to use the short-term borrowing of business cards to manage your cash flow.
Business cards give your startup immediate access to cash to purchase necessary items. Business cards can cover an enormous range of things. For example, you might use one to buy fuel to drive to a networking conference, pay for the hotel while you are there, and cover dinner with a prospective client. Incurring expenses in front of revenue is a norm for many startups, especially we are trying to secure new (perhaps their first) clients to grow the company.
Three types of business cards for cash flow management
There are three main types of business cards:
- Credit cards: this review highlights APR, annual fees, and introduces the key things you should look for when deciding which card to get.
- Fuel cards: this guide explains that supermarket fuel cards can be a good way for small businesses to cover their travel expenses. Grocery reward cards often provide everyday discounts for fuel and provide discounts if your business requires grocery supplies. This article rates the best fuel cards for business, as does this one. One supplier, Wex, provides more information on fleet cards.
- Trade cards: typically these cards are industry-specific.
Using business cards can be a rational method of managing cash flow to cover the day-to-day costs of running a company. Tracking expenses may be more manageable when you employ a buy now and pay at a more convenient date approach. However, this only works if you treat charges and payments with respect and diligence. You must pay for things you need and use the future income that you know is guaranteed on a timely (monthly?) basis. Therefore, assess if a business card can help you manage your costs. Select the one(s) that best suit your needs. In conclusion, the management of cash flow is vital.
Cash flow provides vital security for the business
Security is the reason for using cash flow management, with business loans and business cards potentially a good way of achieving it.
We are not suggesting that you load your company up with debt. However, to get the cash you need, it can help to borrow sensibly, particularly when customer receipts trail the services delivered. Cash flow is vital at all times, good or bad. Instead of turning your nose up at loans or credit cards and seeing your business fail due to insufficient capital, think about how cash flow tools can provide room to focus on running the business rather than managing cash shortfalls.
Understand the latest in cash flow technologies in our CPE courses on accounting and customer support systems in small business accounting with add-ons or mid-market accounting, which includes cash flow systems.