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Whether you consider yourself financially savvy or not, there are some things you need to know about cash flow in order to succeed.
What is Business Cash Flow?
"Cash flow" is a term that gets thrown around a lot but it just means the amount of money moving in or out of a business. A business has cash moving in through revenue or sales and out through expenses. In the ideal situation, you have more cash coming in than leaving your business. That means you have positive cash flow.
Now, cash flow is different from profit. After you’ve paid your taxes, paid your vendors, purchased inventory or supplies and any other bills that your business accumulates, that money left over is profit. Technically, you could pocket all of that as your disbursement as the business owner. But what happens when those bills come due again and your clients haven’t paid you? Or you have an unforeseen expense, like needing to replace your computer?
That’s where having cash flow comes in handy. You never want your bank account to be at zero because there will always be more expenses, and you need to be prepared for those. It may be frustrating for businesses that run lean because often the profit is a business owner’s salary. Still, it’s important to keep money in your account if you want your business to grow.
Ready to become a cash flow master? Keep these four things in mind.
Your Cash Flow Cycle Affects Your Ability to Pay Bills
Every business faces different challenges with how cash flows in and out and how long it takes to do so. For example, if you make homemade baby clothes, you need time for the following:
- Ordering materials
- Producing the product
- Packing the product
- Shipping it
- Receiving funds from credit card transactions
How long your cash flow cycle lasts will impact your cash flow. If your money is tied up in inventory, you can’t use it to pay vendors. Some businesses have tremendously long cash flow cycles, and they have to do some pretty strategic planning to ensure they can keep the lights on while they’re waiting for their investment in the actual production of a product to be returned.
You can improve your cash flow cycle a few different ways:
- Buy smaller batches of inventory (you may pay more per item, but you’ll tie up less cash)
- Hire staff to help you make products during busy seasons
- Institute tactics that help you get paid faster such as requiring all or partial payment for an order up front
The Higher Your Profit Margin, the Better Your Cash Flow
If you haven’t stopped to look at your pricing lately, now might be a good time. If you’re charging too little, you might be working extra hard to keep cash flowing. On the other hand, if your profit margins are higher, you’ve probably got more cash to work with (and that could make that cash flow cycle easier to deal with since you should have money in the coffers). Here are tips to consider for pricing:
- Look at what your competitors are charging, and price accordingly
- Offer extra value to justify a higher price
- Increase pricing just for new customers to keep old ones happy
Certain Investments Can Net More Revenue
It may seem counterintuitive to say that spending more on your business could help you make more, but it’s often true. If you’re spending five hours a week managing your own accounting (or marketing, etc.), that’s time that you could be spending on your company’s growth strategy. Hiring an accountant, marketer, or even an assistant, could free up time to look for ways to improve your cash flow.
Remember: An investment in your business is one that could secure its future. It’s scary when you start spending more money on it, but in the long run, it will always pay off.
You Have Options to Boost Cash Flow
Income isn’t necessarily your only option to keep cash moving in and out of your business. You may also consider small business financing options like a business line of credit or working capital loan so that you have access to funds when you need them.
You should also consider tools like the My Insights to gain a full picture of your financial data. My Insights allows you to connect your American Express® Business Checking and line of credit accounts, as well as accounts from outside financial institutions, in one convenient place so you can better understand your business performance and cash flow patterns. This, in turn, allows you to better prepare for opportunities or unexpected expenses.
Having positive cash flow takes a little advanced planning to help avoid being put in a tough spot and unable to pay your bills. By keeping these four things in the front of your mind, you could help ensure that your bank account always has available funds.
The material made available for you on this website is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.
