5 Tips for Small Business Cash Flow Management
Originally Published by The Capterra Finance Software Blog
There’s a difference between getting paid $50,000 one time each year and getting paid $50,000 over the course of twelve months. That difference is the basic premise of cash flow management. We’re often so focused on profit that we lose sight of how that money comes in and how our expenses go out. By focusing on managing cash flow, we can end those last minute sprints to the bank, the sinking feelings that come with new bills, and the joyless minimum loan payments that result in paying more interest than we need to.
Here are five ways your company can get a better grasp of your cash flow, smoothing everything out and making everyone happier.
1. Track your cash flow
This may seem basic, but it often gets overlooked. Tracking cash flow can be as easy as managing a calendar and adding up a few items, or as complex and predicting future sales and expenditures that haven’t made it on to the calendar yet.
What you’re trying to do is predict when you’ll be getting paid, when you’ll be making payments, and when you’ll have cash on hand, based on your previous track record of these things and the rate at which you’re growing. If you have cash on hand, then you can easily survive the stumbles that come along with everyday business, and you can put your cash to work — more on this in point four, below.
If you want more out of your cash management, you can grab some softwaredesigned specifically for the task. Packages like Budget Maestro and QuickBooks come with predictive tools that can generate cash flow projections for your business. These will not only help you manage your cash, but can also support your loan applications, showing the bank why you’re a good bet.
2. Receive cash quickly
The best way to always have cash on hand is to always be receiving cash. Cutting down on your average payment time means you’re turning inventory — or work — into cash more quickly. Faster cash means less time without cash which keeps your account balance up, freeing you to spend energy and cash on developing your business.
The best way to get payments under control is to institute a strict payment policy for accounts receivable. Get your payment terms down as low as possible. If you have payers that like to hold out for the last possible minute, give them shorter terms.
Always keep your clients in mind, though, to make sure they can meet the terms. You want to get paid as soon as possible, but you don’t want to have to play bad cop with your customers. Many businesses offer early payment incentives to keep things friendly. Pay in the first five days, take $50 off, for instance.
3. Spend cash slowly
While you may not love when companies wait until the deadline to pay you, it’s — in part — your fault for setting the deadline. Take the same advantage that your clients have by paying your bills near their deadline.
This will give you more cash for a longer period of time, and allow you to smooth out your outflows, in addition to your inflows. Keep relationships in mind and never pay late — perhaps with some accounts payable software — but take the time you’re given to make the most of your cash.
4. Put your cash to work
Ashes to ashes, dust to dust — if you don’t take it out and use it, it’s going to rust.
Cash you sit on is cash that gets less valuable over time. As inflation slowly creeps up, the dollar of today becomes next year’s $0.99. Instead of leaving all your cash in a non-interest-bearing account, put some of it in a savings account, short-term investments, or interest-bearing checking account.
The key here is to keep your cash as liquid as possible, while still putting it to work. The bigger a cash buffer you can build up, the more you can use to make more money. Of course, the best way to make money with your cash is to invest in your business, but sometimes you want to keep a significant reserve for dry days ahead.
5. Focus on cash flow, not profit
The hardest part of all this is to change your mindset about what’s important to your business. While making a profit is a great thing, you should try to achieve that profit through managing your cash flow. Then you’ll always have the cash on hand you need to make smart business decisions when opportunities present themselves.
Take time every month or week to check out what your cash flow forecast looks like. When you’re choosing between jobs to perform, keep payment terms and frequencies in mind. That $50,000 contract that pays out once at the completion of work is sweet, but is it better than the $45,000 that pays out every two weeks?
Work with your accountant, your banker, and your business partners to determine the right level of cash flow for your business, and then make sure you’re adjusting as needed. Cash is still the lifeblood of a company, and any time you can avoid taking out a loan, you’re keeping more money in the business.
For more financial tips and trends, follow the Capterra finance blog. If you’re looking for accounting software or budgeting software to get your books in order, check out our directories. If you’ve got some good tips that have worked for you, let me know in the comments.