Top 5 Cash Flow Management Tips for Every Businesses
by Michael Burdick, on May 1, 2017
What goes up must come down… and if you want to avoid bankruptcy, cash that leaves your business must come back in. Cash flow management isn’t the most exciting thing about running a business, but a U.S. Bank study found that over 80% of startups and small businesses fail due to poor cash flow management. If that isn’t a reason to get your spreadsheets in order, we don’t know what is.
Let’s go back to business school 101. Cash flow management might seem simple enough, but you need a solid understanding of the details. Cash flow is essentially the cycle of funds coming in and out of your business. A positive cash flow means the cash coming in from your sales, billings, etc. is greater than the cash going out of your business because of salaries, expenses, etc. It follows that a negative cash flow means the latter is greater than the former.
A negative cash flow is bad news. There are instances in which it cannot be avoided, such as when you’re going through rapid growth. But if your business has a negative cash flow for an extended period of time, you won’t survive long. To prevent that from happening, here are five things to know about managing your business’s cash flow.
1. Profit is not the same thing as cash flow!
Don’t let high profits fool you. Profits are just your revenues minus expenses, and high profits for a particular month don’t necessarily mean that you have the cash in hand to say, pay your office rent.
Of course, there’s a bit of a chicken-or-the-egg issue here. You need to spend cash (often large amounts of it) to set up or grow your business to become profitable… but you also need to literally “cash in” on those profits to have money to spend. Navigating this requires a lot of careful management (and ideally, a solid source of capital or a credit line), so don’t get complacent if sales are great: you still have to actually collect that cash. That brings us to the second lesson...
2. Speed up your receivables process.
Payment upon delivery is obviously ideal, but it’s rarely standard in most industries. The best you can do to minimize the turnaround between spending cash to produce goods/services and receiving cash for providing those goods/services is to establish a clear, efficient, and speedy process to collect customer payments. The goal should always be to collect before you spend.
Offer a discount incentive for customers to make their payments early, and on your end, make sure that invoices are sent and followed up on in a timely fashion. Also consider levying a penalty for late payments.
If you are in a position to extend credit to customers, do your due diligence by setting standards for who is eligible for to receive credit (it is worth asking for credit applications). You need to know the risk associated with operating on credit for each customer, especially if they are having cash flow problems of their own.
3. Extend your payables process.
The flipside of Tip #2 is that you want to have a little leeway when you are the customer. Think about it this way: if you had to pay your rent, utilities, phone and car bills all on the first of the month, but you didn’t get your paycheck until a week later, you’d be in quite the pickle.
You want to take advantage of any flexibility your suppliers or creditors offer you. If you have a month to make a payment, don’t jump the gun and settle those bills right away. If unexpected expenses come up later, you might find yourself short on cash.
Of course, don’t ever use this as an excuse for late payments. Your relationships with your suppliers are important: you want to be a model customer so that they are more amenable to offering flexible payment plans or those early payment discounts we mentioned above.
4. Keep emergency cash on hand.
You have savings and an emergency fund for your personal finances; there’s no reason you shouldn’t have the same for your business finances.
Cash shortfalls happen to everyone. It’s not necessarily the end of the world (or your business), but you do need to be smart about how you handle it.
You should maintain some savings for your business, but you should also set up a line of credit with your bank ahead of time, under the assumption that at some point in the future, you’ll have to take out a loan. Don’t wait to do this until you’re already in a pinch.
This is also where your good relationships with creditors and suppliers come in. You want to establish a record of being good, reliable customers that they won’t mind helping out every now and then.
5. Get help from a finance expert.
The principle behind cash flow management is simple, right? You want more money coming in than is going out. But the day-to-day decisions that go into good cash flow management are complicated. You’ll need to have a deep understanding of every line item of your expenses: not just where it is going, but when.
There is really no substitute for having experienced accountants and CFOs handle your bookkeeping and cash flow management. It’s the kind of behind-the-scenes work that you may not notice when things are going great, but it’s how you ensure that things never go south.
So, you now understand the basic principles of good cash flow management and the importance of having a professional steer your finances. Your next step? Finding a financial professional who is the right fit for your business.