Did you know that 82% of small businesses go out of business due to cash flow issues? Cash flow management is especially important to small businesses because they don’t typically have a huge buffer zone when it comes to finances. If you are a Tucson business looking to have better cash flow management, keep reading!
In my previous posts here and here I talked all about how creating pricing packages helped me. I believe this is the best way to take control of your income and imagine new ways to bring in cash. It’s hard to be good at cash flow management if there is no cash to manage.
What affects cash flow in businesses.
First and foremost, you have cash coming in and flowing out. In startup businesses, this is called the burn rate. The Burn Rate is how fast you are actually “burning” through investors’ cash (or investment). In established businesses, it’s more complicated than that, but as far as cash flow management for a small business in Tucson, this is important to consider.
Very few growing businesses are actually on the cash method of accounting because it really doesn’t tell you where you are in terms of cash flow. Cash in or cash out doesn’t represent cash actually earned and waiting to be received (accounts receivable) or expenses accrued like a utility bill (accounts payable) needing to be paid. You will receive the money but at a later date and you will pay the bill also at a later date. That’s an accrual method of accounting that is KEY to cash flow management.
Using Account Receivable and Accounts Payable to have proper cash flow management.
Established businesses use accounts receivable as well as accounts payable to balance out cash coming into the business and going out. This is true cash flow management. Small businesses may only have a few orders (income) and so it’s easy to calculate it in your head and not absolutely necessary to have a full AR/AP system.
Growth requires a better system for managing your cash flow.
Accrual basis of accounting is the true next step of a solid financial business structure. Don’t get this confused with tax filing, they are separate. You can operate your business on an accrual basis of accounting and report your income on a cash basis to the IRS. These are two different things.
The speed of money must be fairly quick; let’s look at an example.
Let’s say you are an online business based in Tucson and you designed a tote for your customers. These totes will cost you $1,000 to purchase from the manufacturer. You have to buy upfront and send the check for $1,000, even before you have received the merchandise. That is $1,000 you will have tied up until you sell the tote bags.
What can you do to bring in the cash to cover that amount already invested?
A Presale. Do a big push! Advertise and spread the word and pre-sell as many as possible. Get everything in order so that when those totes hit your front porch you can turn around and send them out super fast to your eager customers. You will likely cover your investment and the rest will be profit.
I have seen this happen time and again and I think for smaller companies that are trying to create products, reduce their debt, and get their brand seen by others. It works, and it works well.
Control where you receive cash.
You must design successful revenue streams – it’s the only way your business will thrive.
If you’re in need of some help in planning your cash flow management, let us know. We are happy to help you transition your Tucson business and mind to make cash flow a priority to you early in your business endeavors.