One of the most significant issues tackled during the COVID-19 pandemic was how small businesses could keep their money flowing to survive the dark times. It would be challenging for any company to sustain its operations without robust cash reserves. In fact, poor cash flow remains one of the primary reasons small businesses fail, according to the U.S. Bank.
That said, effective cash flow management is critical for small and large businesses to overcome challenges and tap growth opportunities. For bakery businesses, this means maintaining a healthy inflow and outflow of money to keep the shop in operation.
This article will detail how bakeshop business owners can implement a healthy cash flow management system. Note that these tips are helpful even to small bakeshop owners who manage the business on their own.
Keep inventory fresh
Baking products are generally prone to spoilage, especially when not kept in optimal storage conditions. All ingredients must be maintained in desirable temperatures and airtight containers to obtain their maximum shelf life. Otherwise, these products will become obsolete and head their way into the trash bin.
Store your perishable ingredients properly and implement the FIFO system or the first-in-first-out method, which encourages using older products or those with shorter shelf lives first. This ensures that all ingredients are used and consumed before their “best used by” dates, avoiding wastage and preventable expenses altogether.
Order in bulk
Bulk orders prove to be cost-effective in keeping expenses low and increasing profit. Most small business owners opt for wholesale items because they can get their raw materials at a much lower price and save a few trips to their suppliers.
Note that not all goods should be bought in bulk. It’s 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 in fulfilling customer orders.
It’s critical to balance the business’ inventory by identifying which raw materials are used commonly and which ones aren’t.
Have access to a line of credit
A business line of credit is an entrepreneur’s go-to fund for emergencies such as disasters, an unexpected surge in orders, or equipment repairs. An example of this is the COVID-19 pandemic, where many small businesses scrambled to get access to funding to keep their operations running.
A line of credit allows the borrower to take out funds from their accounts anytime they need more capital. The borrower will need to pay back what they’ve withdrawn, plus interest, on or before the due date. If the borrower did not use the funds, they are not subject to any interest fees.
Small business owners may use their line of credit to maintain positive cash flow in such a way that they gain access to working capital when money gets tight. They can use it to pay bills, hire new employees, or renovate the bakeshop. No matter the purpose, a business line of credit assures borrowers that there is available money for them when they need it.
Raise prices
Most bakeshop owners struggle to turn a profit in their business because they hesitate 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 away or that they wouldn’t be able to attract any customer at all. However, that’s not always true.
If business owners want to generate revenue, their prices must be competitive. They shouldn’t be too low nor too high; they should be just enough to keep loyal customers and make more money.
Reduce unnecessary expenses
One of the most effective cash flow management solutions is cutting back on non-essential expenses to accommodate more critical investments. For example, if you signed up for a monthly magazine subscription service to keep your customers entertained but you noticed that no one ever reads them, it’s best to cut it down.
Also, some expenses do not appear as cash. It may also mean spending too much time doing admin tasks that can be automated. For example, business owners that still do their own bookkeeping could either get an accounting solution to automate the process or hire someone to do it for them.
The main idea is to eliminate unnecessary expenses so there will be more cash reserves for emergencies and other necessities.
Get a bookkeeper
Getting a bookkeeper (whether in-house or outsourced) will go a long way in keeping the books balanced. Whether you hire someone to do the job full-time or part-time, a bookkeeper can prepare invoices, tax documents, and monitor financial transactions. They also create systematized records that demonstrate the business’ ability to sustain operations, pay debts and bills, and expand to new markets.
Bookkeeping is a tedious and time-consuming job that may be too overwhelming to do on your own. Any inaccuracies in the financial documents may put you in trouble when tax and audit seasons come.
Set a budget for every season
A seasonal budget is the cornerstone of a positive cash flow, particularly in the food business. The seasonal nature of sales makes it ideal for business owners to plan their next course of action, whether purchasing new equipment or increasing inventory. This means that tracking cash flow should be done weekly or monthly.
When bakeshop owners plan their budget for seasonal upswings such as the holidays or Valentine’s Day, they are more able to gauge the costs of meeting customer demands--from creating marketing campaigns to preparing for inflation.
Keep personal and business transactions separate
It’s easy to fall prey to money mismanagement when personal and business transactions are mixed. Wise small business owners know that there should be separate personal and business accounts to achieve positive cash flow.
For example, company owners should not use their business credit cards to pay for personal leisure, just as owners should not draw funds from their business accounts anytime they please. Doing so will only mess up the company’s financial reports, making it difficult for the accountant to calculate an accurate taxable income.
Cash flow goes beyond the lifecycle of money – It’s about timing too!
Cash is king, but small bakeshop owners need to consider the best time to send out invoices, repay their loans, collect money, and plan for expansion to keep cash flow healthy.
Running a successful business is a rewarding experience, especially when there are sufficient funds to meet their goals. Without a sound cash flow management system in place, bakeshop owners may find their business closing down for good.
About the Author
Matthew Gillman is a business financing expert with more than a decade of experience in commercial lending. He is the founder and CEO of SMB Compass, a specialty finance company providing education and financing options for business owners.
