As a small business owner, every dollar you put into your business goes through a cash flow cycle before it comes back to you – hopefully with a little profit.The faster your cycle turns, the more money you’ll make. And understanding how the cash cycle works will help you stay on top of the money going in and out of your business.
Step 1 - Receiving Payments
There are lots of ways to get paid for the goods and services you provide your customers. And the more ways you can accept payments, the better.Just be aware that some will take longer to clear, have system requirements or may have fees.So do your homework to be sure the expected increase in transactions processes will offset any additional costs and fees.Cash is the most liquid, but your business should be open to other payment methods such as debit or credit cards, e-commerce, PayPal, checks, direct deposit or by phone. An incoming wire payment will cost you anywhere from $25 and up. ACH is much less expensive and as a result, more popular. For details, talk to your bank about their cash management solutions.
Step 2: Managing Cash
Managing your cash, or liquidity, is different from being profitable - a business can still fail because of a lack of cash even though it's making profits.If you have surplus cash, a basic business bank account will give you immediate access. Or you can invest it to build long-term wealth. Just be sure you have enough cash on hand left to cover operational costs.
Step 3: Making Payments
For everyday expenses such as accounting fees, office supplies, insurance, utilities, building management, travel, vehicle, salary and marketing costs, you may want to use a credit card as it allows you to make payments easily, track expenses and maintain a good business credit history. Consider online business banking as a method of paying your staff, or, when you grow bigger, implementing a complete payroll system.
Stage 4: Financing Purchases
Be sure you have a budget and forecasting tool so you always know how much money is owed to you, how much you owe others, and when these amounts are due. To finance large purchases, talk to your bank to see if you qualify for a business loan.
Stage 5: Inventory Control
Excess inventory means your money is tied up and can’t be used to pay bills or re-invest. One solution is to turn over your excess stock, even at a discount, to get cash back into your business quicker.
Go with the Flow
The cash flow cycle is extremely important to the health of any business, small or large.How you manage your money at every step of the cycle can determine the future of your business – one with a solid, functioning operation or one that slides into failure. Let us know any questions you have about managing your company's cash flow in the comments below. To see how our suite of cash tools can help your business, click here. When you understand your cash flow, you can work to maximize profit and minimize loss.
To learn more about cash flow, watch John Guy explain in this video.