When you run a small business, it is critical that cash is managed carefully. Tools for forecasting (to help predict future income and expenses) and for budgeting (to help manage that income and those expenses) might help you avoid getting into unexpected financial trouble.

Cutting costs improves cash flow, for example finding cheaper suppliers or negotiating payment terms with loan lenders.

Develop a Cash Flow Forecast

Small businesses with poor cash forecasting run the risk of not being able to pay suppliers and coming up short on paying rent. An accurate cash flow projection shows the business how much money is coming in and going out, and therefore whether the business will have enough cash without having to pay for expensive credit lines or loans to make payment. High-quality cash flow forecasting could largely be enhanced by getting staff buy-in for your finance systems and the information they produce. Begin by selecting a time frame – a month or a year for your cash flow projections. List all forecasted inflows – sales and grant or tax refund receipts – and outflows, such as your costs of goods sold, monthly loan repayments, and payroll. You’ll start to see areas for improvement more swiftly because you have these estimates in front of you.

Plan for Slow Seasons

During periods when growth slows, when there’s a spike in seasonality, or when new products don’t take off like anticipated, companies will experience hard times. One of the advantages larger businesses have over smaller organisations is financial reserves at hand for use during hard times; smaller businesses in particular need to be extra conscientious about spending and cash flow to remain financially viable. Spend the slow season tackling overhead that is not necessary to your business model, and reducing your fixed costs. Analysing where you might remove a nonessential cost to the business, and reshaping your budget for the slow season accordingly. It’s also a good time to better know your customers; issue surveys or use other channels (such as focus groups) to accumulate vital client information that could be used to guide the personalisation of client avatars and marketing assets throughout your peak seasons. Similarly, find merchants nearby who can collaborate with you on creative and promotional endeavours during your off-peak seasons, like co-hosting events and generating extra traffic to your establishment.

Negotiate Better Payment Terms

But a good cash flow will enable your business to meet its commitments while retaining enough flexibility to seize the future opportunity as it emerges. Conversely, if you have too much of your cash tied up in stock or unpaid invoices, then you could find you have no cash to deal with unexpected expenses. If cash flow is a challenge, renegotiate longer payment terms with your suppliers as well as your customers. Offer a discount in exchange for prompt payment, and call in customers later than agreed upon to let them know you will penalise late payments – this way, your invoices will get paid on time, which will alleviate your need to revert to overdraft solutions or loan facilities. Buy in bulk to get economies of scale, closely monitor stock levels to avoid overstocking, and run discounts or promotions when slow-moving stock builds up, freeing up cash to use elsewhere. Avoid putting your savings in locked-in investment products – those ‘penalties’ are just another charge for you to pay.

Monitor Tax Obligations

The next key step is getting used to keeping a record of the cash coming in and going out. That means keeping track of your accounts receivable, accounts payable and expenses – all the money owed to your business and the amount still due on outstanding invoices, as well as all the money that’s being spent. If the number going out (expenditures) is less than the number coming in (sales), then you’re doing what any business worth its mettle looks to do: bring in more daily cash than you spend on servicing clients or running your business. Planning ahead in terms of clarifying objectives, spending time and energy forecasting, controlling expenditure levels and undertaking regular budget reviews as part of long-term budget planning are practices that can help minimise the damaging effect of unforeseen bills or cash shortfalls. Similarly, better relationships with key suppliers and lenders and more effective negotiations on payment terms should also help to manage cash flows. Having separate personal bank accounts and separate personal credit cards helps prevent business expenses from being mixed in with personal expenditures – something that is sure to catch the eye of the IRS and that might lead to fines and penalties. Third, turning inventory quickly also redirects cash very quickly, so look for ways to use discount sales offers that might be available.

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