Your business’s financial situation can change at any moment. Which is why it is necessary to have a positive cash flow in your business. But how much cash flow do you need?
When cash flow is positive, you can pay the bills that keep your business running efficiently. When it’s negative, you’re at risk of missing those essential payments, which can disrupt your business.
In this article, we’ll talk about the importance of balancing your cash inflows and outflows, and just how much cash flow you need.
How Much Cash Flow Should Your Business Have?
The standard rule for cash flow management is to have between 3 and 6 months of routine operating costs. Having a financial buffer of a few months gives you financial flexibility and leaves room for disruptions in your business. These disruptions could include equipment repairs, financial fluctuations, economic decline, and other interruptions.
Balancing Cash Inflow and Outflow
Having a healthy balance between your cash inflow and outflow increases your chances of continual success in your business. The balance lets you meet your business’s daily expenses, and still leaves financial room for your business to propel forward.
Cash Inflow
Let’s say you’re a small business owner who owns a nail salon. Your cash inflow refers to the money that enters your business, such as the money you receive from the services you provide to customers like manicures, pedicures, hand massages, and additional beauty services you might offer such as lashes and nail courses.
If your salon sells products, when your customers buy them, that also counts as cash inflow. Other forms of cash flow include funds from loans and investments, or if your salon rents out space to independent nail technicians, their rent counts as cash inflow.
Cash Outflow
Cash outflow is the money you spend on the business. This includes things like monthly rent, inventory and supplies for the business, bills like electricity, water, and waste disposal, and salaries for your employees, and insurance.
Other forms of cash outflow which can be overlooked include customer refunds, unused inventory, and recruitment costs for new staff.
How to Improve Your Cash Flow?
Improving your cash flow isn’t just for businesses with a negative cash flow, if your cash flow is positive, you still need to monitor it and find ways to ensure it doesn’t end up in a negative state. So, a positive cash flow means the cash inflow is higher than the cash outflow.
For instance, if the cash inflow of your nail salon is R 115 000, and your cash outflow is R 40 000, your business has a positive cash flow of R 75 000. You can increase your cash flow through the following methods:
- Offer incentives to increase your customers: You can offer discounts, seasonal or for referrals to increase your customers and cash inflow.
- Avoid delayed payments: Encourage systems for immediate payments like booking fees, options to pay upfront, and subscription memberships.
- Track your cash flow: Use accounting software for small businesses. This will help you monitor and track your cash flow, making it easier to spot issues early on, as well as implement ways to improve your cash flow.
- Consider offering more services related to your industry: If you own a nail salon, and you currently only offer manicures and pedicures, you can consider offering courses to upskill people on how to do nails. Additionally, you can lease out your space to other entrepreneurs in the beauty industry.
- Reduce costs where possible: If possible, you can minimise your inventory size, or find ways to renegotiate terms with your suppliers. However, it is important to ensure you do not compromise on the quality of your business.
How to Calculate Cash Flow?
Cash flow can be calculated in two different ways. The direct and indirect method. For small businesses, the direct method is preferred. It involves calculating cash inflows and outflows from your business operations.
To calculate your cash flow, first, add up all your cash inflows. Then, add up the total cost of outflows. Once you’ve done that, subtract the total cost of your cash outflows from the total inflows, the remaining cost is your business’s net cash flow from operations.
