How to Manage Your Small Business Cash Flow

A business cannot survive without money. But what is the real impact of cash flow on a business and what happens when that business has a cash flow problem? Simply put, cash flow is the amount of money a business has, whether that money is transferred into or out of the business. Managing that money can be a bit more complicated, requiring some useful tools and tips.

“Cash flow is the lifeblood of any business, and without positive cash flow, the business can experience problems in operating the business,” said Bob Castaneda, director of Walden University Master of Accounting Program. “Failure to pay some of a company’s most important stakeholders – such as employees, suppliers, or the IRS – can seriously prevent a company from doing long-term business.”

Good cash flow management is a key part of a healthy and growing business. This guide will walk you through the basics of cash flow management and offer tips on how to improve your business cash flow.

Why cash flow management is a crucial part of running a business

“Cash flow management is simple – think of it as the process of analyzing and tracking how much money you get minus the money you spend,” said Chris Terschluse, Head of Marketing and Content at the house of Carillon. “A company’s ability to optimize its free cash flow is generally an indicator that a company’s overall financial health is strong.”

The reverse is also true. If cash flow becomes an issue, it can lead to issues like late payrolls and the inability to pay vendors or suppliers, which could lead to a business downgrade.

Negative cash flow can impact other areas, “such as reinvesting profits into growth opportunities or the ability to properly staff their already existing operations,” Terschluse said. “Studies show that most businesses fail because of poor cash flow management practices. Without keeping track of your cash flow, it’s easy to spend money you don’t have.

Jenn Flynn, Head of Small Business Bank Division at A capital lettersaid a recent Capital One study which found that 42% of small business owners cite cash flow management as a top concern.

“Moving forward, small business owners should consider developing a cash flow management plan,” she said. “This will help measure how much money is coming in and going out each month. This process will also highlight any potential cash flow shortages and allow business owners to anticipate any issues that may arise in the future. a savings cushion can also help business owners prepare for unforeseen expenses or future growth opportunities. “

Keep your cash flow under control

Flynn pointed out that since effective cash flow management is essential to a successful business, planning ahead can help you get there. It is also imperative to understand your cash flow statements.

“A cash flow statement summarizes the money in and out of a business, detailing cash inflows (from sales) and cash outlays (from expenses),” Flynn said. “These expenses include operating expenses like payroll, utilities, insurance as well as taxes and loan repayments. If you are entering a growth phase, take the time to understand what you will need to support your business now and in the future. It’s important to realize that cash flow issues won’t be solved overnight with a loan. A financial forecast will help determine the timing of cash flow needs. ”

Castaneda said that a good enterprise resource planning system used in budgeting can help you capture and track payment commitments in the future by identifying when goods or services are ordered.

“Weekly and monthly cash budgets should be created and reviewed by management to understand the financial condition of the business,” he said. “Treasury strategies can then be put in place, such as financing long-term assets or developing working capital commitments from suppliers. ”

Flynn also said that “understanding how much money is coming in and going out each month, ensuring prompt payment to customers and suppliers, paying bills on time, planning the financial future, monitoring inventory and various other factors” are key to better cash flow. management.

“The best thing a business owner can do is understand the money coming in and going out, know their finances inside and out, and be diligent about saving extra funds for the unexpected. Additionally, we often recommend that business owners consider opening a line of credit even when cash flow is positive, economic conditions are good, and interest rates are low, ”said Flynn, adding that it can help bring peace of mind in the event of a market downturn, sudden spending, or even an unexpected growth opportunity.

Example of a cash flow statement

Source: Courtesy of Chime

Factors That May Cause Cash Flow Problems

Cash flow issues aren’t just for seasonal or niche businesses. Even a business with the most “in” product or service can run into cash flow problems.

“Cash flow issues can be caused by fundamental issues, such as not having enough customers or clients, not charging enough for your services, or just having too many expenses,” said Flynn.

But these are not the only things that can lead to cash flow issues. Flynn added that they can also be the result of more nuanced or unexpected factors – “for example, a client who is chronically late in paying their bills, an unexpected tax bill, or changes in minimum wage.”

Many of these problems show up in seasonal businesses, Terschluse added, as they tend to generate most of their income during the summer or the holiday season. But the main cause of cash flow problems is low profits, losses, overspending, and excessive customer credit.

“To avoid them, make sure your profit margins support and sustain all business operations, that your inventory meets demand, and limit your customers’ credit or incentivize them to pay off debts quickly,” Terschluse said. .

Dewey Martin, professor emeritus at the Husson University School of Accounting, also noted that companies that grow too fast often have cash flow problems.

“As a small business grows, it will have more money tied up in accounts receivable and inventory,” he said. “Reducing the amount of accounts receivable or the amount of inventory held by a small business can improve an organization’s cash flow. ”

Managing cash flow is a process, Martin said, and as part of that process, a business decides when to pay bills and estimates when it is likely to receive revenue.

“Good cash flow management requires companies to prepare a budget for expected revenues and disbursements,” Martin added. “Managing cash flow is essential to the financial health of an organization. It is quite possible for a profitable organization to go bankrupt due to poor cash flow management. ”

Tips for improving cash flow

There are several ways to improve cash flow that can help keep your business in the dark. There are two great ways to improve your cash flow. Increase the money that comes in and decrease the money that goes out.

Collect unpaid debts.

One way to improve cash flow is to collect unpaid debts.

It is important to send invoices quickly. According to Investopedia, accepting electronic payments makes it easier for customers to pay and get funds to you faster.

You may also want to consider offering early payment discounts. It is human nature to defer paying bills until they are due. Providing a prepayment discount encourages your customers to pay earlier, so you can invest in your business faster.

Finally, customer credit checks can ensure that you are dealing with those who will foot the bill reliably. Refusing a sale may seem counterintuitive, but if you are not being paid for your product or service, the sale is not to your advantage.

Reduce supplier costs.

Lowering your supplier costs can also improve your cash flow. You can do this by negotiating and maintaining good relationships with your suppliers. Also inquire about discounts for wholesale purchases.

You may also want to form a buyers cooperative. There is the power of numbers. If your supplier is willing to offer a big discount on big wholesale purchases, you may be able to team up with other companies to make a big purchase that will save everyone money.

Check your inventory.

Inventory can tie up a lot of money. Of course, this is a necessity for many businesses. However, some items will sell faster than others. Some items are seasonal and some simply fall out of favor over time.

If you have a big excess stocks, you can improve your cash flow by selling it. In addition to tying up your money, there’s storage to consider. Sell ​​it at a discount to get rid of it and put money in your pocket.

You may experience a feeling of “what if”. What if an increase in popularity (and demand) is imminent? It is important to be realistic and logical when it comes to valuing your inventory. Keep what sells. Don’t cling to things out of sentimentality.

Equipment rental.

When cash flow is tight, purchasing expensive equipment can be a big hurdle. You may find it more beneficial to rent the equipment. The purchase often requires a large lump sum which can hurt your cash flow. You need to make sure you have the cash on hand to cover lease payments before getting a lease, but leasing doesn’t have as much of an immediate impact on your cash flow.

Increase your sales.

One sure-fire way to improve cash flow is to increase your sales. A small loss of profit per sale is easily offset by an increase in overall sales. Consider offering promotions and discounts. You can also increase sales by improving your marketing strategy, but this will often require a larger marketing budget, which will decrease your cash flow. You will need to determine if the expected increase in sales is worth it.

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