Find Your Flow: 5 Tips for Managing Small Business Cash Flow

Small business owners work hard to offer a great product or service and provide it to their customers in a profitable way. After all, if a business is not profitable, it probably won’t make it very far. However, a business could be very profitable, and still find itself in a position where it’s short on cash, and needs to scramble to pay their bills, their vendors, and even their employees. This is usually the moment that business owners find out that Net Income, as shown on their Profit & Loss Statement, doesn’t always equal cash in the bank. This is why it’s important for every business to create a process that gives them a clear view into how much cash they will have available throughout the year, so they can plan accordingly. Here are 5 tips that can help business owners manage their cash flow:

1. Managing Accounts Receivable

When a business sells products or services to customers on credit, there is usually a gap between when the invoice is issued and when the customer pays. The challenge for businesses is getting that cash in the door as soon as possible. So, it’s important to set and enforce standards up front with your customers regarding the amount of time you’ll give them to pay you. You can also offer customers an incentive to pay you sooner, such as giving them a discount if they pay within 15 days, instead of 30. Once you’ve set the standards and given incentives, it’s important for business owners to frequently check who owes them money, how long the debt has been outstanding, and how long until its due. This can be facilitated by an Accounts Receivable Aging Report. This report can easily be produced by bookkeeping and accounting software (such as QuickBooks), if all your accounting is up to date. Finally, it’s important to follow up with customers about their outstanding debt. Just like you, your customers are focused on their day-to-day, so a regular reminder will go a long way to get them to pay you as soon as possible. Check out this article for more tips on Accounts Receivable and how to manage them: How to Handle Your Accounts Receivable.

2. Managing Accounts Payable/Creating Vendor Relationships

On the flip side of tip #1, is managing accounts payable, which is the money you owe to vendors or suppliers. It’s always important to maintain a solid relationship with your vendors and suppliers. First, because you don’t want to get a reputation for the guy who doesn’t pay. But also, having a good reputation could help you negotiate more favorable payment terms with your supplier. Meaning they could give you more time to pay. The more time you’re given to pay, the more time you have to collect cash from your customers to be able to pay your vendor. If your business is beneficial to your vendor and you’re both reasonable, you can come to an agreement that works for both of you and further strengthens your relationship.

3. Expense Reduction

Most business owners spend their time thinking of ways and implementing strategies to increase revenue and reach more customers. While that should be the number one priority, it’s important to not neglect the power of regularly monitoring your expenses to find ways to cut unnecessary expenses. The first step in this process is to have a bookkeeping system in place that tracks your expenses accurately and can produce reports that give you visibility into the details of your expenses. Check out the link at the end of this article to grab our FREE Profit & Loss Statement Template that could help you get started tracking your expenses. Through this process, you may find expenses that don’t contribute significantly to your business and can be cut. Also, it could help you find lower-cost alternatives to necessary expenses. For example, shopping around for insurance and finding a better rate, or moving operations to an area with lower rent. By monitoring costs and removing unnecessary ones, you’ll make your business more profitable and help keep much needed cash in the bank.

4. Explore Financing Options

Even with proper management, small businesses can still find themselves short on cash and scrambling to pay their bills. Having a back-up plan is always a good idea to keep peace of mind that you’ll be able to keep your commitments. By exploring small business loans, lines of credit, and even credit cards, you’ll ensure you can fund operations when you’re low on cash. To apply for small business loans, banks will want to know that your business is profitable and can pay them back. Therefore, it’s crucial to have a proper bookkeeping and accounting system in place to produce financial statements that can give banks the confidence in your business is organized and profitable enough to pay them back. A very important note regarding business loans, credit cards and lines of credit is to use them with caution. Only use these instruments when necessary and when you’ve carefully analyzed whether they’ll put your business in a better position in the long term as well as the short term.

5. Cash Flow Forecast

Our 5th and final tip to manage cash flow is to create and maintain a cash flow forecast. A cash flow forecast is a powerful tool to predict what your cash balances will be at the end of every month by estimating your revenues and expenses for the month and adding or subtracting from your opening cash balance. To make this forecast as accurate as possible, it’s important to document the assumptions made while creating the forecast. Assumptions such as:

·        How many cash sales will we make this month?

·        Are we estimating any returns related to these sales?

·        What incremental expenses will we have from those sales?

·        Do we expect our customers to pay us on time?

·        How much time do we have to pay our vendors?

Although the assumptions will depend on your type of business and industry, the concept is relatively simple. Estimate cash inflows and outflows for each month. The challenge is to estimate those inflows and outflows accurately by evaluating the assumptions every month and adjusting them as necessary. Consistency with your forecast will give you the best chance of making impactful decisions in a timely manner.

Cash the life blood of any business. Managing it correctly will help your business stay healthy and with enough reserves to meet all its obligations and maintain good relationships with vendors and employees. Additionally, consistent cash flow management will give you the tools necessary to implement strategies and seek outside funding if necessary.