When your business is growing, it needs access to money. And that’s whether your business is capital-intensive or not. You also need it for daily operations. Payroll, bills, and supplies take up your need for funds. In fact, the National Federation of Independent Business in the US revealed that 82% of small businesses fail because of mismanaging their money.
Financial Management and Its Importance
It’s been said many times before. Money is the lifeblood of any business. You need funds to start a business, keep it running, and letting it grow. When the amount that enters your business is measured for a specific period, it is called a cash flow. There are two ways in how it comes to your business.
First, if more money is coming in than the amount left, it is called a positive cash flow. It enables you to cover expenses ranging from bills and other operational costs. Now you have working capital.
The second is the other way around. If more money is leaving than there is coming in, that is a negative cash flow. When this occurs, you don’t have the necessary money on hand to pay for your expenses. In other words, your business can stop running if you don’t have enough cash to go around.
Knowing how to manage this properly is an essential building block for managing your business’s finances. Successfully managing it means figuring out when to have money on hand, how to get it faster, and how to spend it accordingly to avoid getting into problems. If you know how to do it, you can grow your business and improve your profit.
Financial management is essential for business, and doing so is challenging. Here’s how to ensure that your business has the funds it needs.
Getting customers to pay you faster is one of the most obvious ways to improve the flow. But it’s not that easy to accomplish. They want to protect it first, and they’ll hold off paying you until they can until you let them.
You have to make sure that your business has enough funds, so you have to remind customers about promptness. You have to encourage them to pay with no delay.
There are many ways to encourage your customers, and one of them is to send regular emails as reminders of their outstanding balance. That may not be that effective, but any actions can help you. To motivate your customers to pay, offer discounts for on-time payments made through credit cards.
Tighten Credit Requirements
Starting or growing businesses always have to contend with customer credit, which they extend because they want to gain more customers. If you’re in the same case, do your research about the risks involved. You have to make sure that your customer can pay bills on time. For B2B (business-to-business) credit, check if your client’s business is earning or losing. Find out if they are having their own problems with finances.
One way of finding information about your customers’ finances is by requiring them to fill out a credit application form. It should indicate your credit policies and requirements.
Monitor Debt and Savings
No business is free of debt. There can be circumstances like this, but only in the short term. According to Investor’s Business Daily, PayPal leads the list of companies that have no long-term debt.
If you need to borrow money, do it as a temporary fix. And before you do, monitor and evaluate the fund management with diligence. Develop a repayment plan once your business is healthy enough. And until your debt is paid, monitor your expenses and make adjustments where necessary. For example, you can lease a building for now instead of buying a commercial space or lot.
You should also monitor your savings. Even if you have a debt, make sure that you still keep a portion of your money in a business savings account.
Cash Flow Forecasting Can Help
You have to work your way into achieving a positive cash flow. It doesn’t happen by chance. Consulting cash flow management firms can help with analysis or forecasting. It can help you ensure that your business still has money to pay its obligations. In other words, you should analyze your cash flow to effectively manage the outflow and inflow.
Remember, if you’re on top of your financial management, you can make better decisions for your business and foresee where your money is going. Plus, you’ll know when to expand your business and protect its relationship with other companies.