One of the most important issues addressed during the COVID-19 pandemic was how small businesses could flow their money to survive the dark times. It would be difficult for any business to maintain its operations without strong cash reserves. In fact, low cash flow remains one of the main reasons small businesses fail, according to the American Bank.
That said, effective cash flow management is essential for businesses large and small to overcome challenges and exploit growth opportunities. For bakery businesses, that means maintaining healthy cash inflows and outflows to keep the store going.
This article details how bakery business owners can implement a healthy cash management system. Note that these tips are useful even for small bakery owners who run their businesses on their own.
Keep inventory fresh
Bakery products are generally prone to spoilage, especially when not kept in optimal storage conditions. All ingredients should be kept at desirable temperatures and in airtight containers to achieve their maximum shelf life. Otherwise, these products will become obsolete and end up in the trash.
Store your perishable ingredients properly and implement the FIFO system or the first in, first out method, which encourages older products or those with shorter shelf lives to be used first. This ensures that all ingredients are used and consumed before their expiration date, thus avoiding waste and avoidable expense.
Wholesale orders prove profitable in reducing expenses and increasing profits. Most small business owners go for wholesale items because they can get their raw materials at a much lower price and save some trips to their suppliers.
Note that not all merchandise should be purchased wholesale. It is important to know what and when to place bulk orders. An overwhelming amount of inventory requires maintenance costs and consumes more space. On the other hand, a lack of raw materials would be detrimental to the execution of customer orders.
It is essential to balance the company’s inventory by identifying which raw materials are in common use and which are not.
Have access to a line of credit
A business line of credit is a contractor’s go-to fund for emergencies such as disasters, unexpected increases in orders, or equipment repairs. One example is the COVID-19 pandemic, where many small businesses have struggled to access finance to continue their operations.
A line of credit allows the borrower to withdraw funds from their account whenever they need more capital. The borrower will have to repay what he has withdrawn, plus interest, by the due date at the latest. If the borrower has not used the funds, they are not subject to any interest charges.
Small business owners can use their line of credit to maintain positive cash flow so that they have access to working capital when cash is tight. They can use it to pay bills, hire new employees, or renovate the bakery. Whatever the purpose, a business line of credit ensures borrowers have money when they need it.
Most bakery owners struggle to make their business profitable because they are reluctant to raise prices even when the price of their raw materials goes up. Most of them believe that charging higher prices to long-time customers would turn them off or that they might not be able to attract any customers. However, this is not always true.
If business owners want to generate income, their prices must be competitive. They should be neither too low nor too high; they should be just enough to retain customers and earn more money.
Reduce unnecessary expenses
One of the most effective cash flow management solutions is to reduce non-essential expenses to enable more critical investments. For example, if you signed up for a monthly magazine subscription service to entertain your customers but noticed that no one ever reads them, you might want to cut it down.
In addition, some expenses do not appear in cash. It can also mean spending too much time doing administrative tasks that can be automated. For example, business owners who still keep their own books could either get a accounting solution to automate the process or hire someone to do it for them.
The main idea is to eliminate unnecessary expenses so that there is more cash reserves for emergencies and other necessities.
Get an accountant
Getting an accountant (whether in-house or contracted out) will go a long way in keeping the books balanced. Whether you hire someone to do the job full time or part time, an accountant can prepare invoices, tax documents, and monitor financial transactions. They also create systematic records that demonstrate the company’s ability to maintain operations, pay debts and bills, and expand into new markets.
Bookkeeping is tedious and time consuming work that can be too difficult to do on your own. Any inaccuracies in financial documents can get you in trouble during tax and audit season.
Set a budget for each season
A seasonal budget is the cornerstone of a positive cash flow, especially in the food industry. The seasonal nature of sales allows business owners to plan their next course of action, whether it’s purchasing new equipment or increasing inventory. This means that cash flow monitoring should be done weekly or monthly.
When bakery owners plan their budget for the upward seasonal periods such as the holidays or Valentine’s Day, they are better able to assess the costs of meeting customer demands, from creating marketing campaigns to prepare for inflation.
Separate personal and business transactions
It is easy to fall prey to mismanagement of money when personal and business transactions are mixed up. Savvy small business owners know there should be separate personal and business accounts to achieve positive cash flow.
For example, business owners shouldn’t use their business credit cards to pay for personal entertainment, just as business owners shouldn’t be withdrawing funds from their business accounts at any time. This would only spoil the company’s financial reports, making it difficult for the accountant to calculate accurate taxable income.
Cash Flow Goes Beyond The Money Lifecycle – It’s About Timing Also!
Cash is king, but small bakery owners need to consider the best time to send out bills, pay off loans, raise cash, and plan for expansion to maintain healthy cash flow.
Running a successful business is a rewarding experience, especially when there is enough funds to achieve your goals. Without a strong cash management system in place, bakery owners can see their business shut down for good.
About the Author
Matthew Gillman is a corporate finance expert with over a decade of experience in commercial lending. He is the founder and CEO of SME compass, a specialty finance company providing training and financing options for business owners.