Cash Flow Risk Management in Small Business

Even the greatest business ideas fail at times because entrepreneurs fail to account for cash flow risk management. You can launch a new business and connect with potential customers, but you need to be proactive in identifying possible areas of risk.

The truth is that money is flowing in and out of your company daily. As the cash ebbs and flows, you need to be sure that there is always a reserve for whatever might be needed in the future. Sometimes, future costs are anticipated, such as tax payments or payroll expenses. Other times, these costs fall into an emergency line-item, such as repairs after a natural disaster or inventory loss.

You can’t predict the future and avoid all risk. At the same time, you can be proactive right now to ensure that your business will withstand whatever might happen to your business. Being smart with your cash flow is essential for keeping your small business running through the good times and bad. This is where cash flow risk management comes in.

Cash Flow: What You Need to Know

Do you feel overwhelmed at the idea of taking control of your cash flow? Even though it seems like a daunting task, it doesn’t have to be hard. The simplest solution is to work with a team of accounting professionals to identify areas of risk and opportunity for your company. Then, you can create a plan for cash flow risk management and optimize systems to ensure that you have a little saved for a rainy day,

Keep in mind there is a big difference between cash flow and profits. Just because money comes into your bank account, doesn’t mean that you have the freedom to spend it on whatever you feel like buying in that moment. Instead, the funds are often marked for a specific purpose – upcoming expenses that need to be paid. Cash flow means that you always have the money available when it is needed.

In comparison, business profits are the funds that are left over after expenses have been paid. Just because the cash is flowing through your business, it doesn’t necessarily mean that you have healthy profit margins. Improving cash flow can be beneficial for boosting profit margins because cash flow management can be an integral part of budgeting and spending. As a result, you might find it easier to decrease your spending, which in turn can boost your profits if there is more money coming in than going out.

Negative Cash Flow vs. Positive Cash Flow

Cash flow is the process of how money is moving through your company. At any given point, you likely have money coming in and money going out for necessary expenses. The trick is to learn how to balance the flow so that you can control what is happening in your bank account.

If you have a positive cash flow, then it means that more cash is coming into your accounts than the expenses that are flowing out. On the other hand, negative cash flow means that you are spending more money than what is coming in.

Remember that it is natural for businesses to fluctuate between positive and negative cash flow. For example, retailers often have a positive cash flow during the holiday season when everyone is shopping for holiday gifts. Then, cash flow will drop in January after the holiday rush comes to an end.

Just because the cash flow fluctuates from one month to the next, doesn’t mean that you can’t keep your business running. Cash flow risk management means that you are proactive in managing your immediate cash, while also preparing for these anticipated fluctuations in the future. In the accounting industry, separate financial documentation is used for cash flow (known as your cash flow statement). This report summarized all financing activities, including investments, operations, and costs.

Why Cash Flow Risk Management Matters for Investors

One of the reasons why cash flow risk management is an important thing to consider in your business is because these numbers can have an influence on whether others are willing to invest in your business. When you are consistent with your accounting records and you can show a positive long-term cash flow, then it is an indicator of the health of the company. Additionally, positive cash flow speaks volumes about your stability, creditworthiness, and the overall value offered through your business efforts.

New business owners might feel that investors are still far in the future. But you never know when your business will hit a new opportunity and need more investment capital. Start managing your cash flow right now so you are ready to tap into new potential by bringing in investors in the future.

Cash Flow Risk Management Tips

Where should you start if you need to improve your cash flow risk management? Here are a few tips to help you get on track with these goals:

  1. Identify Your Plan: You can’t take a passive approach when it comes to financial reporting and ongoing tracking. It’s important to not only identify your plan, but work with financial experts to determine the right steps needed for your business. Creating a strong financial plan guides your decisions, and also helps you maintain a clear vision of the possibilities in the future. This business plan works as the guiding star for your budgeting and strategy.
  2. Control Your Debt: While credit is often unavoidable for both new and established businesses, you need to be deliberate and careful in the way you are managing this debt. Whenever possible, it’s best to pay for expenses upfront instead of financing unnecessary costs. At the same time, it can be helpful to have credit available in case you encounter an emergency situation. Even if you don’t need credit right now, consider applying for a business line of credit or another type of business loan, giving you access to funds if/when they are needed in the future. Then, be careful to keep those balances low so you don’t have a heavy debt load. Whenever possible, make sure that you are paying the credit lines in full each month to avoid carrying balances from one month to the next.
  3. Choose the Right Insurance: Even though insurance premiums might seem like a heavy cost right now, they are an essential part of protecting your business. One accident or natural disaster could be the end of your business! Investing in the right insurance coverage means that you have a back-up plan in place in case the unexpected happens. Insurance should be an integral part of your cash flow risk management because it means that you have support available to get through the hard times.
  4. Diversify Your Business Efforts: Having all your “eggs in one basket” can be risky in business. Make sure that your money is coming from multiple sources, so you aren’t left in a difficult situation if one of the income sources runs dry. If you have an established business, then you might look for ways to expand your offerings so you have multiple streams of income.
  5. Watch the Market: Economic changes and various market conditions can play a role in the success of your company. It’s important to identify potential areas of risk within your business, then stay proactive in watching the changes that are happening in your specific industry – as well as the market as a whole. Instead of putting all of your cash into investments, it’s smart to have strategies for liquidity when needed.
  6. Hire Professional Services: Sometimes, you don’t know what you are missing because of a lack of experience in certain aspects of running a business. As a business owner, you are carrying a lot of responsibility at the same time: product development, marketing, accounting, employee management, and more. Instead of trying to handle everything by yourself, it’s important to hire professional services where it makes sense. For example, these pros can help you uncover potential areas of risk, then identify strategies that will mitigate that risk.

Accounting Services for Minimizing Cash Flow Risk

A solid accounting plan is an important step to take care of the financial health of your business. When you have consistency with the reporting and a clear plan for the future, then it’s easier to make the difficult cash decisions when they arise. Instead of hoping for the best, now is the time to take control of your cash flow to ensure that you are poised to help your business grow.

If you are looking for ways to improve your cash flow, then it can be helpful to talk to an experienced accounting team. At Easier Accounting, we provide outsourced accounting and offer personalized services for small businesses. Our team specializes in the strategy and care needed for startups, entrepreneurs, and small business owners like you. We invite you to reach out for a consultation to see how we can help with cash flow risk management and other necessary accounting services: (888) 620-0770.

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