Running a small business is hard work. Many owners and founders find themselves managing every facet of their companies, from daily operations and marketing to accounting and cash flow.
However, unless you have a background in finance, managing your company’s cash flow may prove to be more of a challenge than you thought. In this article, we’ll take a look at some tips for cash flow management for small businesses.
The Basics of Cash Flow
Many people confuse cash flow with profits. They’re related concepts, but they’re not the same. Here’s a more detailed distinction:
- Cash flow is your net balance of cash (cash inflows minus cash outflows) over a set period
- Profit is your net income (your total revenue minus expenses) over a set period
Understandably, you might associate cash flow problems with a lack of profitability. However, it’s entirely possible for a profitable small business to run into cash flow problems.
Many companies use accrual-based accounting. This means they record revenue when a sale happens, not when they actually receive money. If there’s a delay in receiving that money, it may create issues.
For example, imagine that your company has sold $200,000 worth of products this month, but you’re awaiting payment from your clients. You have $80,000 in your business account, but you need to pay a supplier $100,000 by the end of the week.
Overall the company is showing profitability. However, because of the timeline of receiving the cash from clients, you’ve run into a cash flow problem.
When you understand strategies to manage your cash flow effectively, you’ll be far less likely to run into situations like these in the future.
Cash Flow Management for Small Businesses: Strategies to Consider
No matter what industry you’re in, it’s critical to have enough liquidity to reliably cover your company’s expenses. The following tips for cash flow management can help you do just that.
Emphasize Cash Flow Management Over Profits
Many business owners believe that profitability makes up for cash flow problems. That may be true in some cases, but it’s not something you should count on. Poor cash flow management can lead to serious issues you can’t fix with profit alone.
To avoid major problems, focus on maintaining a healthy cash flow over maximizing profits. That doesn’t mean you should forget about profits entirely. It just means you should place a little more emphasis on cash management.
If you aren’t already, get into the habit of creating cash flow statements that track incoming and outgoing cash on a daily basis. Once you have data to refer to, you can start creating cash flow forecasts. That way, you can anticipate future cash shortfalls and take steps to mitigate them before they happen.
You may be able to create cash flow statements yourself, but if you want accurate projections, consider investing in financial management software for business.
Optimize Your Accounts Receivable
Many small business owners face cash flow problems due to delays in receiving payments. While you can’t control customer behavior, you can take certain steps to optimize accounts receivable and increase the likelihood of on-time payments:
- Send an invoice after product delivery if payment isn’t immediate
- Set a schedule for regularly following up on overdue invoices
- Offer customers discounts for early payment
- Use software to automate the invoicing process
- Create one-click payment options to make payments easier for clients
Some small businesses ask for upfront payments from new clients or those at risk of not paying. Depending on your industry, this may be a viable option to help protect your cash flow.
Optimize Your Accounts Payable
For most small businesses, payables can be divided into two categories:
- Critical: Includes payroll, rent, taxes, and other payments essential to staying in business
- Flexible: Includes payments to vendors, suppliers, and other entities that will typically negotiate payment plans when needed
If your company is headed for a cash flow pinch, you can’t just push this month’s payroll two weeks into the future. However, you may be able to get in touch with a vendor and arrange a change to the due date.
If you can reliably predict when your company’s major cash inflows occur, try to schedule outgoing payments accordingly. This may not be possible for every business, but if you can manage it, you may be able to alleviate significant financial stress.
Remember that communication is essential when it comes to negotiation. So is paying when agreed. Doing both of these things will help you maintain the solid business relationships that will keep your company going.
Contact the knowledgeable team at Devine Consulting today to learn more about how to optimize your company’s accounts payable.
Secure a Business Line of Credit Before You Need It
If your business is short on cash at a critical time, it can lead to problems that compound week after week and month after month. If you have access to a business line of credit, your company will have a safety net it can rely on in case of a financial emergency.
The key is to research your options and secure credit before you actually need it. You don’t want to rush into applying for business loans and lines of credit when you’re already in a crisis.
Additionally, keep in mind that having access to a business line of credit can’t protect you from every consequence of a cash shortage. For example, you generally can’t use a credit card to fund payroll.
If you anticipate a major expense in the future and you don’t think you’ll have the cash flow to cover it, a small business loan might be worth considering.
A business line of credit lets you access and pay back only the capital you need, but a business loan provides you with a lump sum up front, which you can then pay back in fixed installments over time.
Invest in Financial Software
When you first started your company, you may have used a spreadsheet to manage your finances. Many small business owners think that spreadsheet-centric financial management is still enough as their companies grow. More often than not, though, switching to dedicated financial software will make cash flow management infinitely easier.
Here are some common financial software features that may make a major difference for your company:
- Real-time cash flow monitoring
- Cash flow projections
- Automated invoicing
- Revenue and expense tracking
- Instant financial report generation
When it comes to adopting financial software as a business owner, there’s almost always a learning curve. However, it’s well worth putting in the time and energy. Once you understand how your software works, you’ll have a much better handle on your company’s finances and spend far less time managing them.
Monitor and Control Costs
To calculate your cash flow, you just need to subtract your cash outflows from your cash inflows. If you can eliminate unnecessary expenditures, you’ll increase your cash flow.
To do this, make it a priority to regularly analyze your company’s spending and cut down where you can. You shouldn’t make this your only means of cash flow improvement, but when you use it alongside other strategies, it can make a difference.
To help keep costs in check over the long term, create a business budget if you haven’t already. You may find that your cash flow becomes more predictable when you have a budget you can stick to.
Create a Cash Buffer
Creating a cash buffer may or may not be feasible depending on your circumstances. However, if your company is in a position to do so, it’s something you should absolutely prioritize.
Ideally, your cash buffer should be enough to cover anywhere from one to three months of essential business expenses. That way, if you run into a slow period or have a temporary cash flow issue, you won’t have to struggle to remain in business.
Make sure to keep your cash buffer in an account that’s easily accessible. If you run into a financial emergency, you should be able to get to your cash reserves quickly.
Implement a Point-of-Sale (POS) or Inventory-Management System
The more accurate your financial picture, the less likely you’ll be to encounter surprise cash flow issues. If you don’t have one already, consider implementing a system for accurate, real-time inventory management.
A system like this can help you optimize your cash flow in many ways, including:
- Tracking what items sell the fastest
- Reducing your chances of overbuying (and therefore tying up cash in unsold inventory)
- Collecting real-time transaction data
- Mapping sales trends
These systems will almost always streamline your operations, which leads to decreased labor costs and better cash flow.
Need Help With Cash Flow Management?
Cash flow management for small businesses can be complex. And if you’re spending too much time thinking about how to optimize your cash flow, you’re probably not spending enough time focusing on your company itself.
Devine Consulting can lend a hand. We’re dedicated to providing full-service accounting solutions to small business owners in Texas and elsewhere. Whether you’re just looking for some strategic guidance or you’re hoping to fully outsource your company’s accounting, we want to hear from you. Get in touch with us today!