By Evan Vitale
As a small business owner, you may hear the term “cash flow” used a lot, but you may not fully understand what it means (and how important it is to your business).
Cash flow is typically the No. 1 reason why businesses succeed or fail.
Here’s how it works:
Cash flows in as your customers pay for goods or services and it flows out as you make payments for goods and services. Easy right?
The key, of course, is to make sure cash is flowing in quicker (and in larger amounts) than it is going back out the door. Therefore, if you have $50,000 in sales in January and $60,000 in expenses, then you have a negative cash flow of $10,000.
Sometimes, the cash coming in might be slower because clients and customers are slow to pay which keeps you waiting for payment. Not only does this cause cash flow stress, but it may cause you to rely on credit to pay bills or delay your payments.
The key is to find ways to increase cash flow and collect your accounts receivables as quickly as possible.
Another idea is to manage your inventory since it can quickly tie up your cash. Here, you’ll need to be a better forecaster in predicting supply and demand. Some businesses will reduce inventory which will help free up cash. However, you’ll want to make sure you have enough inventory on hand to service your customers’ needs.
Finally, manage your accounts payable and negotiate with suppliers. Always follow the terms set forth by your suppliers. However, some suppliers may offer discounts for early payment or offer 45-day or even 60-day payment terms – both of which can increase your cash on hand.
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Want to learn more about improving your company’s cash flow? Connect with Evan Vitale on LinkedIn.