Best Cash Flow Patterns for Small Businesses

Best Cash Flow Patterns for Small Businesses
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Eshna

Last updated October 29, 2016


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Cash flow refers to how money gets into and out of a business. Having good cash flow patterns gives every business owner peace of mind that their business is financially sound. As a result they are in a position to focus their energy and resources to earning their businesses more cash. This in turn goes into building a healthier company. Furthermore, there are fewer interruptions of the business activities as a result of cash problems. It is possible for a business to be making good returns yet because of their bad cash flow, they end up not having any money to continue functioning.

One can only get the right cash flow pattern for the business if they know how to better manage their cash flow. Having a cash flow projection has been seen by experts to be very important in maintaining the financial sanity of small businesses. On the other hand, without a good cash flow blueprint, the business may be headed for closure.

Keeping the flow of cash steady will make it possible to know what kind of future the business is headed for. The best pattern is one in which there is more money flowing into the business than that flowing out. For a small business to grow and make more money, it needs to know the kind of cash flow pattern it has.

This is because there are different cash flow patterns that small businesses could be operating and using the wrong one could be costly. One of such patterns is where money flows in and out without there being any investments or savings made. On the other hand, small businesses can choose to adopt a pattern whereby money that comes in is used to make more money. This is through the right strategies such as having assets that will grow the company’s money.

A small business can choose between a conventional otherwise known as normal cash flow pattern or an unconventional one. This is especially when they need to carry out a project. With the conventional one, it involves having money flow out of the business and afterwards it will be followed by cash flowing in. With the unconventional cash flow pattern, cash flows out at first but what follows is money continuing to flow in and out of the business. Keeping the cash flowing in the ideal pattern requires the right cash management strategies.

How to manage cash flow more effectively through cash flow projections?

Cash Flow

Managing the flow of cash in a small business means that you focus more on getting money in rather than giving it out. To do this, it is important to have a years, months or even week’s estimate of cash flow ready. This will help you know when the flow of cash is not right enabling you to set up the corrective measures as soon as possible before things get worse. This is for the reason that cash flow patterns will worsen with time and there are always signs when this is about to happen. Most small business owners tend to miss these signs due to the lack of cash flow projections.

Some experts insist that one should always have a good estimate of how much cash balance the business will have in the coming six months. This will enable you to know how well you are managing the business. This projection also comes in handy when one intends to take a loan for the business. This is because many credit facilities will need the projections for them to give out a loan as it is an indicator of the ability of the business to repay the loan and in good time too. These forecasts are in addition helpful in knowing how much the business is likely to sell in future.

A good cash flow outline is one that includes the past cash flows and has an exception for changes that the business may encounter such as sale alterations. They are not an exact indicator of the cash flow to be expected but it’s a blend of several aspects. To make a good plan, one needs to know exactly how much the business intends to spend, when it intends to do so and what the money is for. Developing a good cash flow pattern, one needs to take into account the following:

Always Having Cash Available:
When the money runs out, then the business is headed for trouble. It is therefore important that one takes all necessary measures to ensure that the business always has cash available as that is the only way to keep it afloat. Cash is the most valuable thing in the business. It should also come first at all times.

Get to Know the Business’s Current Cash Balance:
This will ensure that financial decisions made are done so using correct figures. This then minimizes the chances of making decisions detrimental to the health of the business.

Avoid Procrastinating Activities:
Do what needs to be done when it needs to be done. This will ensure that the cash balance recorded is precise. In the event that one cannot handle the particular activity, delegating it to someone else is advisable as long as the work is done.

What’s more, ensure that the business lives up to its promises to customers and clients. This is to ensure that they get money in because without providing products and services no payments will be made.

A good pattern on your cash flow will enable the business to save a lot of money:
This is by avoiding unnecessary costs. One way to do this is to have a budget that is followed to the letter. Reduce the money moving from the business by ensuring to benefit from discounts or any incentives offered by suppliers. Know when you need to raise your prices through regular checking and comparison with competitors. Another strategy for reducing the cash flowing out of the business is for the small businesses to purchase goods as it will cost you less compared to buying on your own.

Finally, as a small business, it is important to note that delayed payments or payments not made at all will have a big negative effect on the cash flow pattern. For this reason, the policies on credit should be well laid out to prevent this. This will help to raise their flow of cash.

About the Author

Eshna is a writer at Simplilearn. She has done Masters in Journalism and Mass Communication and is a Gold Medalist in the same. A voracious reader, she has penned several articles in leading national newspapers like TOI, HT and The Telegraph. She loves traveling and photography.


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