10 Tips for Managing Cash Flow in Your Business
As the name suggests, cash flow is the amount of cash flowing in and out of your company. It’s an important tool for diagnosing a business’s financial health.
Positive cash flow is when the money flowing into your business from sales, accounts receivable, etc. is more than the amount leaving through accounts payable, wages, and other expenses, while a negative cash flow means your outflow is greater than your incoming cash. This usually means trouble for any business.
If you’re wondering how to handle cash in a small business, here are some cash flow management strategies to make sure you stay in the positive zone.
Tips for Managing Cash Flow
1. Perform a Cash Flow Analysis
Performing a cash flow analysis regularly is essential when it comes to managing cash flow in a business. These numbers will tell you just how much is coming in and how much is going out of your business so you can adjust accordingly and in good time. It should also include forecasting what’s to come.
If you’re not good with numbers, many software accounting programs such as QuickBooks have reporting features that make cash flow analysis easy. However, you should make sure not to consider pending invoices as part of your cash flow.
2. Determine Your Break-Even Point
Though a break-even point does not directly affect cash flow, it gives you an early goal to strive for and a target for projecting future cash flow. This makes businesses more deliberate with their spending and income generation, which positively impacts cash flow.
3. Focus on Cash Flow Management, Not Profits
Looking at profits does not give a complete picture of your cash flow because a profitable business can still run out of cash. Small business cash flow management should take into account inventory, accounts payable, capital expenditures, and taxation.
4. Stay on Top of Invoicing
Bill your invoices as early as possible and collect quickly to guard against late payments. Make sure your invoices are straightforward and easy to read, with key areas like due date, the amount due, where to send payment, and payment methods highlighted. You should also consider taking a “due upon receipt” approach over the usual “due in 30 days” invoice.
5. Bring in Money Faster
Once those invoices are sent out, regular follow up with customers can generally help with collecting receivables faster. Offering deals and discounts for speedy payment is often a good incentive. For large orders or long-term contracts, keep money flowing by asking for an upfront payment as a deposit.
Construction companies are a good cash flow management example when it comes to this strategy. Most require a deposit upfront before drawing up project plans, then charge half the remaining amount when work begins, and the balance upon completion. This allows them to keep up with hefty building costs.
6. Maintain a Cash Reserve
It isn’t unusual for customers to delay payment, which can leave your business in a cash flow crunch. Keeping reserve money to buffer these shortfalls can save you a lot of agony. As a best practice, try to have enough cash reserves to last you for a three to six month time period for account payables and working capital needs.
7. Get a Business Line of Credit
Short-term financing such as a secured business line of credit can bail out small businesses when they are short of cash, bridging the gap between payables and receivables. They can also be used to make payroll or pay for other pressing expenses. L3 Funding offers a line of credit that is super quick and simple to apply for, which is invaluable in managing your cash flow during emergencies.
8. Delay Your Payables
Though one of the most simple business cash management techniques, holding out on payables as a way of managing cash flow is often overlooked. Figuring out how late you can pay your vendors without risking late fees or harming your relationship can help you keep cash in your account for longer, just remember that it will also increase your debt.
9. Cut Your Costs
The best way to stay on top of your expenses is to minimize them. Businesses only take to cutting back when they are in the red financially, when instead it should be a constant practice in considering how to manage cash flow. Review all recurring monthly, quarterly or annual expenses to see what you can do without and explore ways to renegotiate terms on loans or leases.
10. Keep Your Cash Growing
It goes without saying that generating more cash is an effective way to increase positive cash flow. There are many ways to do this. You could keep your cash balances in higher-paying interest-earning accounts, liquidate cash tied up with assets, or look for creative ways to boost sales or convert more customers. If you were wondering how to manage cash in business, these tips are a good starting point.
With time, cash flow management will feel like second nature. Keep in mind that it’s always good to work with reliable, quick-paying clients and have a go-to quick and reliable financing partner.
L3 Funding understands the challenges that small businesses face daily and can offer you funding that not only helps your business survive but thrive. Talk to us to learn more about our merchant funding services.