When we talk about cash flow, what exactly do we mean? The term refers to the amount of money you’re able to generate from your business that you’re then able to use. In other words, it’s the difference between your expenses and your income at any given moment in time – and having enough cash flow means that you can operate without worrying about money or getting further loans or credits. Follow these seven tips for increasing cash flow, and you’ll be well on your way to strengthening your business bottom line.
7 Tips for Increasing Cash Flow
The first step in improving your cash flow is to figure out where it’s going. To do that, track your spending for one month. Write down everything you spend, and review it all when you’re done. If you don’t see a problem, then keep going—if not, try these seven strategies below
1) Take Advantage of Free Money
When you’re starting out, there may not be enough revenue coming in to keep up with all of your business expenses. That’s where grants and other forms of free money can come in handy. Many government agencies as well as organizations like colleges and foundations give out grant money every year for a variety of different purposes.
It might take some time and legwork, but applying for and securing grant funding is often completely free—in other words, it’s cash that you get no strings attached! Plus, many times these grants are awarded based on need; if you have a business idea or startup that has potential but just needs some financial help getting off the ground, free funding can be a great way to make your idea become reality.
2) Use Tax Deductible Expenses Wisely
Did you know that some business expenses can be deducted from your taxes? Deductions reduce your tax liability. Keep track of deductible expenses so you can deduct them from next year’s taxes. This allows you to maximize your tax deductions each year. A good place to start is with equipment purchases, office supplies, and travel costs.
These are common expenses and should not be overlooked. Remember that many small businesses take advantage of opportunity costs by making investments in their company today which will increase profits in future years. Be sure to keep track of these as well since they are also a type of tax deduction (which means they lower your taxable income).
Here are a few other things you may want to consider keeping track of mileage, meals while traveling for work, home office space and utilities, parking fees at work or at public transportation locations, subscriptions and memberships for professional development, advertising fees, or contracts paid annually or monthly and telephone bills. And don’t forget to record receipts for all expenditures!
3) Keep an Eye on Employee Absences
It’s normal for employees to get sick or have other issues that come up once in a while. But if you’re noticing an unusually high number of unscheduled absences from employees, it could mean morale problems are brewing within your company. Watch out for warning signs like employee gripes about their salaries, missed deadlines, and more. If you do discover a problem in your office, try not to react too quickly. Instead, be proactive about coming up with solutions so everyone can enjoy a higher quality of life at work—and outside of it.
4) Understand What Interests are Tax Deductible
Interest expenses incurred in connection with an investment activity, including those relating to borrowed money, are generally allowed as a deduction. However, interest is not deductible for tax purposes if it is paid or accrued on indebtedness incurred or continued to purchase or carry obligations of a character that are not capital assets.
For example, borrowing money to buy a stock is not tax-deductible, but borrowing money for use in business activities that generate business income would be considered a deductible business expense. Additionally, payments made under revolving charge accounts are also generally treated as interest expenses.
5) Define What Counts as an Extraordinary Item
Extraordinary items are any one-time expenses or income that are not related to your company’s day-to-day operations. Examples of extraordinary items include a lawsuit against your business, a nonrecurring item like an asset sale, or even an asset purchase. Some companies define extraordinary items as those that occur less than once per year while others say they happen less than once every few years. Whatever definition you use, make sure it applies universally across all of your businesses (if you have multiple ones) and that everyone on your team knows what it is. That way, you’ll know when something counts as an extraordinary item and can avoid being blindsided by unusual expenses in other parts of your business because there won’t be any confusion about what’s considered extraordinary.
6) Create a War Chest
Making money isn’t a one-time task; it’s an ongoing process. Start by putting aside a portion of every paycheck, so you have money set aside just in case you need it. Create a rainy day fund with at least three months of living expenses. If your business is seasonal, reserve funds for those slow times too. Knowing you have money stashed away will help alleviate some financial stress and free up time to focus on other aspects of your business (like growing sales). Look into retirement savings options like 401(k) plans that allow small businesses to contribute pre-tax earnings directly from their checking accounts while reducing their taxable income.
7) Don’t Invest in Businesses with Negative Cash Flows
It’s simple: Don’t invest in any business with negative cash flows. This isn’t a rule of thumb; it is a rigid law that cannot be broken. Investing in businesses with negative cash flows is actually gambling and is akin to taking out an equity loan on your house, using that money to place bets on sporting events, and then paying back your loan with interest after you lose all your money betting on sports.
Conclusion
Ultimately, increasing cash flow doesn’t have to be complex or challenging. To increase your cash flow, get strategic and analyze your existing business processes and costs. Keep in mind that you may need to do a little extra work with some of these strategies, but it is well worth it when considering how much easier your job will become as a result. Good luck!