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How to use cash effectively in your small business?

    Published August 18, 2023 – Effectively managing cash is crucial for the success of any small business. Here are some practical tips to help you make the most of your cash.

    Monitor Cash Flow

    Monitor Cash Flow: Regularly track your incoming and outgoing cash flow. Use accounting software or spreadsheets to create cash flow statements. This will give you a clear picture of your business’s financial health and help you anticipate cash shortages.

    Step 1: What is Cash Flow? Cash flow refers to the movement of money into and out of your business. It’s like keeping an eye on the money that comes in (income) and the money that goes out (expenses) over a specific period, typically a month or a year.

    Step 2: Why Monitor Cash Flow? Monitoring cash flow is crucial for running a successful business. It’s similar to checking your bank account to know how much money you have at any given time. By doing this for your business, you can understand your financial health and make informed decisions.

    Step 3: How to Monitor Cash Flow: Cash Flow Statements To monitor cash flow effectively, you can create something called a “cash flow statement.” Think of it as a report that shows all the money your business receives and spends during a certain period, usually a month. This statement is like a financial map that helps you navigate your business’s money matters.

    Step 4: Tools for Creating Cash Flow Statements You can use either specialized accounting software (computer programs designed for managing finances) or spreadsheets (like Excel) to create your cash flow statements. These tools make it easier to organize and calculate your income and expenses.

    Step 5: What Cash Flow Statements Show: Cash flow statements typically have three main sections:

    1. Operating Activities: This section covers the money that flows in and out due to your day-to-day business operations, like selling products or services.
    2. Investing Activities: Here, you’ll see money related to investments, like buying or selling assets (equipment, property) that your business needs to operate.
    3. Financing Activities: This part shows transactions involving loans, debts, or equity – basically, how your business is funded.

    Step 6: Benefits of Cash Flow Monitoring: Regularly monitoring cash flow and creating cash flow statements offers several benefits:

    • Early Warning: It helps you spot potential cash shortages before they become serious problems. For instance, if you know you might run low on cash next month, you can take action to prevent it.
    • Planning: Cash flow statements let you plan ahead. If you foresee a period with more expenses, you can adjust your spending or seek additional funding.
    • Decision-Making: You can make informed decisions about expanding your business, hiring employees, or taking on new projects based on your cash flow situation.

    In a Nutshell: Monitoring cash flow means keeping track of how much money comes into and goes out of your business. You can create cash flow statements using accounting software or spreadsheets to understand your financial health, anticipate cash shortages, and make smart business choices. It’s like managing your business’s money flow to keep it healthy and thriving.

    Create a Budget:

    Step 1: What is a Budget? A budget is like a detailed plan for your money. It helps you decide in advance how much you’ll earn and how much you’ll spend. Just like making a shopping list before going to the store, a budget helps you manage your finances wisely.

    Step 2: Why Develop a Budget? Developing a budget is important because it keeps your spending under control and ensures you’re using your money wisely. It’s a bit like making sure you have enough money for the things you really need before spending on things you want.

    Step 3: Creating a Comprehensive Budget: To develop a comprehensive budget, you need to list down two main things:

    1. Expected Income: This is the money you expect to receive, like your salary, payments from your business, or any other sources of income.
    2. Expected Expenses: These are the things you know you’ll need to spend money on, like rent, groceries, bills, and other costs.

    Step 4: Sticking to the Budget: Once you’ve created your budget, the important part is to follow it as closely as you can. This means trying not to spend more than what you’ve planned for in each category.

    Step 5: Why Stick to the Budget? Sticking to the budget is like following a roadmap to reach your financial goals. It helps you:

    • Avoid Overspending: By staying within the limits you set, you prevent yourself from spending more than you can afford.
    • Allocate Money Wisely: Your budget ensures that you’re directing your money to the most important things first, like bills and necessities.
    • Plan for Goals: If you’re saving up for something special, like a vacation or a new gadget, your budget helps you set aside money for it.
    • Handle Emergencies: A budget can also include a category for unexpected expenses, like medical bills or car repairs, so you’re prepared for surprises.

    Step 6: How to Use Your Budget: Think of your budget as a guideline for your spending. Before making a purchase, check your budget to see if you have enough money allocated for that category. If you do, great! If not, you might need to adjust your spending in other areas.

    Manage Accounts Receivable:

    1. Sending Invoices Promptly: An invoice is like a bill that you send to your customers, showing what they need to pay you for. It’s important to send these invoices quickly after you’ve provided your products or services, so your customers know how much they owe and when the payment is due.
    2. Following Up on Overdue Payments: Sometimes, customers might forget to pay you or miss the payment deadline. In those cases, it’s a good idea to reach out to them and remind them politely that their payment is overdue. This helps ensure they don’t accidentally forget to pay you.
    3. Offering Discounts for Early Payment: To encourage your customers to pay you sooner rather than later, you can offer them a discount if they pay before the due date. This gives them an incentive to make their payment promptly and helps you get your money faster.
    4. Implementing a Late Fee Policy: A late fee is like a penalty that you charge if your customers don’t pay you on time. By having a late fee policy in place, you encourage your customers to pay on time to avoid these extra charges. It’s a way of making sure people stick to the agreed-upon payment schedule.

    Negotiate with Suppliers:

    So, you decide to build a strong friendship with your cookie supplier (your friend who bakes cookies). You talk to them often, you’re friendly, and you show them that you really appreciate their cookies. This way, your friend is more likely to give you special benefits.

    One special benefit you might ask for is a way to pay for the cookies over a longer period of time. Normally, you might have to pay for each batch of cookies right away, but you could ask your friend if you can pay them a little bit later, like a week or two after you get the cookies. This gives you more time to earn money before you have to pay for the cookies.

    Another benefit you might ask for is a discount. Imagine you usually buy 10 cookies at a time, but you want to buy 30 cookies this time. You could ask your friend if they can give you a special price because you’re buying so many at once. This way, you save some money when you buy a lot of cookies together.

    Control Inventory:

    1. Optimal Inventory Levels: Think of your store like a piggy bank. You want to put just the right amount of money (or toys) in it so that you can use it whenever you need it. If you put too much money in the piggy bank, you won’t be able to use it for other things you need. Similarly, if you have too many toys in your store, it’s like having your money stuck in those toys. So, you want to make sure you keep a balance – not too many toys, but not too few either.

    2. Excess Stock and Tying Up Cash: Imagine if you bought way too many toys and your store became really crowded. Those extra toys are like your money that’s stuck and can’t be used for other important things, like paying bills or getting new toys that customers really want. So, having too many toys in your store ties up your money, and you want to avoid that.

    3. Inventory Turnover Rate: Now, let’s talk about how quickly your toys are selling. Imagine you have a magic timer that tells you how long it takes for your toys to go from your store shelves to the hands of your happy customers. The faster this happens, the better it is for your store and your money. This magic timer is your “inventory turnover rate.” You want this timer to be as short as possible because it means your toys are selling quickly and you’re making money.

    4. Adjusting Purchasing Strategy: Sometimes, you might notice that your toys are either flying off the shelves really fast or they’re just sitting there for a long time. If they’re selling super fast, it’s great! But if they’re not, it’s like your magic timer is running really slow. To fix this, you might need to change the way you buy new toys. If toys are selling quickly, you might want to buy more of them so you don’t run out. And if they’re not selling fast, you might want to buy fewer of them so you don’t end up with too many stuck in your store.

    Minimize Operating Costs:

    Renegotiating Contracts: Think of contracts like promises between your business and other companies you work with. Sometimes, you can talk to those companies and ask if they can give you a better deal. It’s like asking if you can pay a bit less for the same things.

    Energy-Efficient Solutions: Imagine your business uses a lot of electricity, like lights and machines. You can look for ways to use less electricity without making things dim or slowing down. This can help you save money on your energy bills.

    Outsourcing Non-Core Activities: Think of your business like a team. Some tasks, like answering phones or cleaning, might not be the most important things your team does. You can hire another team, like a cleaning company, to do those tasks instead. This way, your main team can focus on the most important things, and you might even save money by not having to hire extra people.

    Delay Non-Essential Spending:

    The idea here is to be smart about how you use that money. You want to make sure you take care of the things that are really important first, and if you have to, you can wait a little bit on the things that aren’t as important.

    So, think about things you really need, like food, paying your bills, and keeping your business running smoothly. These are essential items because you can’t really do without them. It’s like making sure you have enough money for your basic needs before you start spending on things that are more like extra treats.

    On the other hand, there might be things you want to buy or do, but they’re not absolutely necessary. These are non-essential expenses. For example, imagine you run a business and you’re thinking about buying new equipment or giving your office a fancy makeover. While these things might be nice, they’re not urgent. You can wait a little while before spending money on them.

    Explore Financing Options:

    So, you’re running a business, like a lemonade stand. Sometimes, you might not have enough money right away to buy lemons and cups, but you know you’ll make enough money when you sell the lemonade. So, you have two choices to get the money you need:

    Lines of Credit: It’s like asking a friendly neighbor to lend you some money until you can pay it back. So, you can buy what you need for your lemonade stand, and when you make money from selling lemonade, you give back the money you borrowed.

    Business Loans: This is a bit like borrowing money from a bank. You get the money you need for your lemonade stand, and then you slowly give it back to the bank along with a little extra (called interest) for letting you borrow the money.

    Offer Discounts for Cash Payments:

    When customers come to your shop and want to buy something, they can pay you in different ways. One way is by using actual paper money, like dollar bills and coins – that’s paying in cash. Another way is by using a special card called a credit card, which lets them buy things without using physical money right away.

    Now, when customers use credit cards, there’s a small fee that you, as the shop owner, have to pay to the company that handles the credit card transactions. Think of it like a little extra cost for the convenience of using a credit card. This fee can add up over time and eat into the money you make from selling your awesome stuff.

    So, to encourage customers to pay in cash (those dollar bills and coins) or in a way that’s almost like cash (using their bank to send money directly), you can offer them a little reward. This reward is like a small gift – let’s say a discount – that they get when they choose to pay with cash or its close cousin, a bank transfer.

    Forecast Cash Needs:

    Create cash flow forecasts for the coming months or even years. This will help you anticipate periods of tight cash flow and make informed decisions about when to cut expenses or pursue additional revenue streams.

    Build an Emergency Fund:

    Set aside a portion of your profits as a contingency fund to cover unexpected expenses or dips in revenue. Having a safety net can provide peace of mind during challenging times.

    Regularly Review and Adjust:

    Continuously monitor your cash flow strategies and financial performance. Regular reviews will help you identify what’s working and where adjustments are needed.