7 Tips for Business Cash Flow Management
Business owners face many challenges, and one that frequently gets overlooked is cash flow management. Your top priorities may be honing your product or finding more customers because you know money needs to come in. But what about how much you're spending? How long does it take to get paid after you send invoices?
When you hear frightening statements such as the age-old claim that the Small Business Administration says more than half of businesses fail, there's often little context to it. But the truth is that 82% of those failures are attributed to poor cash flow management.
If you don't want your business to become part of this statistic, it's critical to understand how cash flows work and what makes them different from other accounting concepts.
Understanding the Difference Between Cash Flow and Profit
Profit results when subtracting your expenses from your revenues. If you made $200,000 in sales and spent $50,000 on supplies, research, and rent, your profit is $150,000. But you likely don't have $150,000 in cash on hand at year-end.
Cash flows are calculated similarly to profit, but they're your cash receipts (cash inflows) minus cash expenses (cash outflows). Revenue can be high, but excessive non-payment and late payment means negative cash flow.
Some businesses have fairly even cash flows, like medical practices. Software and real estate have lopsided cash flows with years of cash outflows but no inflows until a project is complete. Protracted negative cash flow causes business failure, which is why monitoring your net cash flow is so crucial.
Business Cash Flow Management Tips
1. Create a Cash Flow Forecast
Cash flow forecasts help you determine how much cash you should strive to have on hand for expenses in the near future. Forecasting utilizes both your historical data and what you can reasonably expect for your business cycle, such as holiday shopping in e-commerce.
While it's impossible to predict every positive and negative event that will affect cash flows, your cash flow forecast still provides a framework tailored to your business. Your historical data helps you determine when you tend to collect cash quickly and what times of year you're apt to run into a cash shortage.
2. Have a Contingency Fund in Place
Contingency funds provide you with peace of mind and cold, hard cash to get you through times when you have few cash inflows but are bleeding cash outflows.
An accountant that you trust can help you determine how much you should have set aside in your contingency fund. It works a little differently than your personal savings, as you need to account for predictable cash outflows like rent and payroll plus unpleasant surprises like repairs.
3. Monitor and Manage Account Receivables
Your receivables are key to shortening your cash conversion cycles. If you don't receive payment upfront from customers, look at how quickly you bill them.
The payment terms on your invoices should be clear. You will also need an invoicing solution that lets you track and follow up on late payments and gives you clear data on how long it takes you to collect payment.
4. Focus on Expense Management
Expenses also affect your net cash flow, and you tend to have more control over many expenses compared to how quickly you get paid. Look for areas where you can cut costs without compromising quality and safety, such as:
Opting for virtual conferences instead of events requiring long-distance travel
Getting rid of subscriptions you barely use
Monitoring expenses that look unusually high or that could be pruned easily
5. Focus on Inventory Management
Inventory can have an adversarial connection to positive cash flow. Inventory-dependent businesses need it on hand, but items that don't sell constrict cash flows. Examine your inventory turnover time:
Which items sell out in hours or sit in the warehouse for months?
What's your average inventory turnover?
New businesses and expanding companies are particularly prone to cash flow problems because inventory levels sharply increase.
6. Negotiate Vendor Terms
See if you can negotiate with your vendors to ease potential cash flow issues. Building more personal relationships with your vendors will get you better prices or longer payment terms that can get you out of a bind.
7. Explore Financing Options with the Help of an Accountant
Financing can be a major boon or a disaster for your business depending on the type, amount, and purpose of the loan. There are situations where financing can significantly free up cash flows.
A skilled accountant can help you navigate your financing options and understand the right time and purpose for external financing.
Searching for a Trusted Accountant to Help with Your Business Cash Flow Management?
No matter the business, negative cash flows will lead to failure. An operation that looks successful by profit may not be collecting cash quickly and efficiently enough to pay its expenses. Don’t let it be yours.
Book a call with Accounting Made Accessible to learn how we can help you avoid cash flow problems and build a successful business.