Cash flow is exactly what it sounds like: the amount of cash going into and coming out of your business. However, this isn’t an instance you’ll want to “go with the flow.” Keeping track of your cash flow and developing strategies to put more cash in your system and keep it there is an important step towards small business success.
Cash is one of the most important assets a small business can have. Expenses can’t be paid off without it, and with loans hard to come by and even harder to pay off, good cash flow management is more important than ever.
Here are 5 tips for managing your business’s cash flow:
1. Keep an emergency cash reserve.
Few things are more relieving than the knowledge you have a nice pile of cash to fall back on should things go wrong. Save enough cash to cover 3-6 months of your business expenses-- and if you save even more than that, even better! A cash reserve can help you pay off your expenses during slower months, but it will come most in handy in situations you least expect.
Do you know your chances of having a business emergency? It’s a hard question because emergencies are unpredictable and often unpreventable. The only thing we know about emergencies is that they are 100% inevitable. Planning for the inevitable will give you and your business a boost when you need it most.
2. Ask your consultant for a customized statement.
You can’t manage your cash flow if you’re not keeping track of it. Creating a cash flow statement is an important step towards cash flow management. This step is particularly important for startup businesses so that they know when they have reached the “break-even” point, when their income matches their expenses. Of course, a small business in any stage will not want to have doubts about where its money is coming from and where it’s going to. One way to stay on top of your cash flow is by using an online template of a statement.
Of course, managing your own cash flow statements can be overwhelming, especially when the numbers are getting larger and the vendors more varied. You are busy with a million other day-to-day tasks, and, despite its importance, keeping up with a cash flow statement might be far from your mind. You can ask your business consultant to step in and create a customized statement that will make cash flow management simpler. When a consultant is managing your cash flow statement, communication is key to staying in the loop and making informed financial decisions. Meet with your consultant about your cash flow on a monthly basis to discuss any changes or patterns in your statement.
3. Entice your customers to pay sooner rather than later.
Having cash at your disposal is crucial to your ability to pay off expenses and stay off loans. That means you’ll want your customers to make their payments as soon as possible. You can offer cash-only promotional incentives, like discounts or buy one get one free items, to entice your customers to make immediate payments. You can also instill payment rules to ensure you have cash in your system at all times. One way to do this is by asking your customers to make partial-cash deposits at the time of purchase.
If your customer is over-due on a payment, try to handle the situation on your own, first. Call the customer regularly before going to a collections agency-- the agency will take a large cut of the profit.
4. Communicate with your vendors about payments.
Keeping up a good relationship with your vendors is always a good idea. If you need an extension on a payment, it will help if your vendor already understands your financial situation.
Of course, making payments on time whenever you can is crucial for your cash flow. Pay attention to vendors’ terms so that you can make payments in the most convenient way for your business. If a vendor gives you a 30-day payment period, use those 30 days to your fullest advantage. Paying earlier than the deadline will only take cash out of your business sooner, and you’ll want to have control over your funds for as longs as possible.
5. Ask your CPA about changes in tax payments.
If you’re predicting future cash flow, you’ll need to take taxes into account. A certified public accountant is always a step ahead of the latest changes in tax policies and payments.
Touching base with a CPA regularly will help you better predict what your tax expenses will look like, which in turn will give you an idea of how much cash you’ll have after tax season.