How to Manage Cash Flow While Scaling Your Business
Every business has an underlying profit motive, but it’s deceptively difficult for small businesses to balance their resources to maximise their profit ceiling.
Cash is one resource that businesses have to have a good grip on. As a business scales to greater and greater heights, the responsibility of the owner and the managers grows alongside it.
This rapid progress can be a good thing if business owners have a plan of action on how to handle their onset of growth.
That said, if a business carelessly expands, it can buckle under the pressure and become a huge cash drain for its owners. Unmanageable debt may be imminent at the first sign of a financial slowdown.
Balance is key for a business to grow sustainably. Fortunately, there are several ways you can control your cash flow effectively. Let’s explore seven ways to manage your cash flow as you grow your business in greater detail.
1. Invoice Clients Promptly
One important way to steady your business growth is by ensuring that you invoice your roster of clients promptly. Communicate your payment schedule and terms with your clients so that both parties would be on the same page regarding billing timings.
Acquiring a predictable cash flow ensures that you’ll always have a cash stream coming your way. This makes it easier for you to plan and schedule your business’s expansion without worrying about whether you have enough money to cover it.
Furthermore, enforcing a rigid payment schedule also sets a culture of timely payments between parties. This makes your client more likely to pay their receivables on time.
It also helps your financial department make more accurate records and forecasts within their financial systems. Having an established system can carry over as you expand your business, making growth weigh less heavily on your accounting and budgeting team, and to every other department as an extension.
2. Regularly Monitor Cash Flow
Every business owner should be up to date with their business’s cash inflows and outflows.
While you’re not expected to know everything at any given time, you should at least be informed about it once a new report goes out—whether that’s weekly or monthly. Having an overview of your company’s finances allows you to see whether your business is performing well or needs significant changes.
Your financial team should prepare monthly financial statements that you can assess and review. In particular, make sure that they prepare a cash flow report, a balance sheet report, and an income statement. From the information present in these reports, you can quickly see what aspects of your business are draining your cash reserves and what’s fine.
This ongoing awareness allows you to make informed decisions that keep your business aimed towards a path of stability.
3. Control Inventory Management
Whether you’re operating a mom-and-pop thrift shop or a restaurant, it’s essential that you optimise your inventory management to maintain a healthy cash flow. This is especially crucial as your business grows and faces shifting inventory demands.
An unoptimised inventory management system can lead businesses to face two major dilemmas. They could either have an oversupply of products that could expire and constrict the cash flow from fulfilling other operational needs. They may also have a shortage of products, leading to an inability to meet the customer’s demands and reducing their revenue ceiling.
In either case, cash flow is stunted. To help provide balance, it’s essential for your company to track inventory systematically.
There are multiple inventory management systems online that can support accurate inventory tracking. Some of these tools provide a more specialised experience for specific industries, so it’s best to do your research on what tool best fits your business.
Leveraging these technology tools is often preferred over manual tracking for businesses looking to scale and deal with larger quantities of inventory. By abiding by these lean inventory management systems, you can spearhead business growth without undercutting or overcommitting resources.
4. Establish a Line of Credit
Early on in your operations, consider building a good credit score to increase your chances of getting a higher line of credit for your business.
You don’t need to max out this credit line. However, having a line of credit within reach helps you acquire money in a pinch—such as when your business is scaling beyond your current capacity and you need the money to support its operations.
A business line of credit, in essence, is a loan arrangement that small business owners can utilise to get funds and pay at a later time with interest. The amount of money your business can loan hinges on your credit score and overall profile.
If you have a history of making prompt repayments in the past, this can naturally increase your credit score, thus increasing the amount you can borrow. Increasing your credit score requires you to uphold sound financial habits like making prompt and accurate credit reports and not maxing out your credit line every month.
Related: Business Loans Finance Guide
With a line of credit, your operations will become more flexible and less reliant on client payments, mitigating the risks of delays. This, in turn, can help you more efficiently spread money at your disposal in the way that best benefits your business needs.
5. Reduce Unnecessary Spending
When growing your business, it’s important to be strategic with how you allocate payments.
More often than not, you’ll have to increase spending in certain areas of your business to deal with increased demand, such as inventory and equipment. Upscaling any of these naturally increases your monthly costs.
If you want to take your business to that level of growth, then you’ll have to be more defensive with how you choose to utilise your capital. Review your financial statements and list out areas of it that aren’t positively contributing to your operations but are costing you money.
From that list, consider removing them from your process or substituting them for cheaper alternatives. For example, you may choose to unsubscribe from a service that you’re not using, or lower it to a more basic plan.
This can lead to increased savings and an easier time scaling later on by helping you pad up your capital considerably without affecting business efficiency.
6. Have a Business Savings Bank Account
Another essential tool growing businesses should possess is a dedicated business bank account.
Unlike a personal savings account, a business bank account is equipped with a load of features that make holding business funds and conducting business transactions a much easier task.
This is especially helpful for your finance team, as this bank account allows access to multiple people in a varied capacity.
Furthermore, creating this separation simplifies business growth, as your financial team can easily track your expenses and report them accordingly without worrying about making any mix-ups with personal transactions.
On top of that, business savings accounts come with exclusive features that can support your business, such as credit card support, higher loan limits, and a plethora of other exclusive business bank features.
In any case, a business bank account makes it easier for both you and your team to handle transactions and conduct various financial activities, making it a worthwhile investment if you want to legitimise and scale your business.
7. Encourage Timely Liquidation of Receivables
If you’re servicing other businesses or have time-based payment terms, keep your clients committed to making timely payments.
One of the major hurdles businesses face is a high receivable-to-cash ratio. Being in that situation can cause your business to remain illiquid, which can heavily impede your ability to scale and grow your business in a consistent and timely way.
Not to mention, it can also bring your business closer to debt as you’ve fulfilled a service and paid for its costs but haven’t received the pay for rendering it.
Many businesses have to deal with payment delays to remain afloat, but there are ways to encourage clients to pay on time. One such way is by providing an incentive to prompt payment, like giving discounts or offering flexible payment terms for on-time payments.
On the contrary, you can also penalise clients for late pay by adding an extra charge. Ensure that this is stipulated in the contract to leave no room for misinterpretation.
If your client pays on time, your cash flow will be considerably easier to handle, making business growth much more achievable.
We wish you the best in scaling your business!
