Understanding how to manage cash flow can be challenging to a new business owner. To get a better grasp, keep reading to uncover cash flow management tips all new business owners should know.
What Is Cash Flow?
Cash flow is essentially a snapshot of your businesses finances that is taken during a specific period of time. It shows you how much money is flowing in and out of your business which lets you know how flexible and liquid your company is.
You typically want to analyze and track your small business’ cash flow on a monthly business. It can also be helpful to check in on these numbers weekly, quarterly and annually, while also checking in on your Net 60 terms vs. Net 30 terms.
Why Is Cash Flow Important?
Cash flow is key to the lifeblood of your organization. It’s how salaries are paid, supplies are bought and how investments in your company’s infrastructure can be made.
If an owner of a company cannot efficiently manage their cash flow, then that business is almost destined to fail. Owners that are able to manage their cash flow, on the other hand, are able to improve just about every aspect of their business.
A lot of small businesses tend to make mistakes when it comes to accounting their cash flow. Often they will fail to track bills, over forecast sales, improperly allocate resources during their start-up phase, and essentially they don’t plan ahead.
Tips to Improve Cash Flow Management.
It is possible to improve your cash flow management, as long as you follow these tips.
Anticipate Future Needs.
You want to try your best to avoid any surprises. There is nothing more challenging and discouraging than desperately looking for money last minute. To do this, you’re going to want to keep up timely accounting records that are accurate.
This is key to help you understand where your business stands financially. You can use your past monthly cash flow statements and income in combination with your balance sheet to determine the available cash and predict results for the next few months. This can help alert you before there are any shortfalls, so you have enough time to prepare
Build Connections With Lenders.
The chances that you will be able to borrow cash or intrigue investors to invest in your company when you need it, is likely low. Bankers typically don’t lend to companies that are desperate because they want to feel confident that they will get paid back.
So the best way to get money from investors when you need it, it to start connecting and networking with the financial community before you need help. This way you’ll be able to get loans more easily in the future.
Keep Your Cash Working.
You want to keep your cash balance in accounts that are interest-earning, which you usually can get at most banks. There are some cases where you might have a minimum balance requirement. However, since interest rates on these accounts tend to be lower than savings accounts, you might want to consider keeping your money in higher paying accounts.
You’ll want to transfer your funds as needed so you can meet the minimum that is required for your balance requirement. You’ll also want to avoid any long-term certificates of deposits, as these tend to lock you in for a period to time, and if you redeem them early you can lose your interest.
This is why it’s best to either invest in a CD that is penalty-free CDs or commit only a portion of your funds that you don’t need during the time of the CD.
Train Your Customers.
Being a small business owner, you want to make sure that you get paid for your products or services either before or shortly after you pay the expense of delivering or producing your products and or services. The goal of this outcome is that you get your payment on delivery or COD, but that’s not always the case.
So you’ll want to invoice your customers the day that you deliver the product and stress that the payment is expected on your invoice receipt. Do not suggest that your customers wait until the end of the month to pay you. You can also charge interest for any payments that are made 30 days later and have collection procedures if that payment isn’t made.
It’s also important that you stay on top of any accounts that are receivable aging with a report that categorizes the accounts receivable depending on the length of time they have been outstanding.
Work with Your Vendors.
Similarly to how you want your customers to pay you on time, your vendors will also want payment as soon as possible. But don’t jump the gun, if you pay your vendors too early, this can hurt your cash flow, so try to avoid this whenever possible.
You’ll want to delay your payment as long as you can while still being consistent with all of the terms of the sale. If there isn’t a penalty for late payments, then you’ll want to set a pay cycle for 45 to 60 days from when you get a receipt of the invoice.
Slowing the outflow of cash is important, but it’s just as important that you keep a good credit rating as well as good relationships with your critical vendors. Know that a slowed payment could result in bad contact from the vendor who affected. In cases like this, you’ll want to make sure that you get all your future payment in as promised.
Maximize Cash Inflows.
There are a bunch of methods and ways that you can increase your cash flow, especially if you sell products that are custom or engage in any extended contracts. If you work with contracts, you’ll want to set up payment schedules and amounts that exceed or parallel your sunk costs. If a client wants a modification of a standard product or service that hasn’t been identified in the contract, you’ll want to get an additional payment.
Manage Your Cash Flow Today.
Now that you have these tips on cash flow management, start turning around your cash flow today. Your cash flow can make or break your company, so start making these changes as soon as possible.