Small business success depends on many factors, and one of the most important of these is keeping up with an aspect of small business accounting called cash flow management.
Often cash flow problems are not due to insufficient revenues but due to poor cash flow management systems. In other words, cash flow problems may arise simply due to neglect. What generally happens is business owners get so focused on the more urgent aspects of their business, from generating leads to making sales, they fail to keep track of their cash flow.
What Exactly Is Cash Flow Management?
Cash flow management is the analysis of the cash moving in and out of your business.
It consists of three elements: accounts receivable, accounts payable, and shortfalls.
Accounts receivable is what people who buy your goods or use your services owe you. Accounts payable is what you owe the people who supply you what you need to run your business. If, for instance, you have a retail business, then your suppliers are wholesalers who provide you with the manufactured products that you will resell to your customers. Finally, shortfall is what happens when you have more money going out to your suppliers then money coming in from your customers.
Tips for Cash Flow Management
Fortunately, it’s not difficult to learn how to get good at cash flow management. Here are 6 tips to help you optimize how well you keep track of the cash flowing in and out of your business:
- Outsource printing your transaction mail.
By outsourcing your invoice printing, statement, and mailing services to a company like Microdynamics Group, you don’t have to worry about buying high-quality printing equipment that gives you MICR, spot color, or full color. Instead of worrying about the quality and correctness of your transactional mail pieces, you can leave the details and accuracy to seasoned printing professionals.
- Work with vendors when you are short on cash.
Sometimes your incoming revenue doesn’t sync with your vendor’s account payables. When this happens, the worst thing you can do is to default on your payments and the best thing you can do is negotiate with your vendors. You can ask them to extend due dates. You can also ask them if they would be willing to consider longer payment terms. Vendors don’t want to lose your business and when you are up front with them, they will work with you. If you make a reasonable offer on when they can expect payments from you, they will often be willing to adjust their billing cycle.
- Focus on creating reserve funds.
Just as in personal finances, you don’t want to spend all the money you have after you’ve paid all your bills. When you have an exceptionally good month, one where you earn a surplus income, be sure to set some money aside instead of reinvesting all of this money back into your business.
Business, like life itself, has cycles. Sometimes things go amazingly well and sometimes you have unexpected setbacks. You can’t always forecast these boom and bust cycles because the future is not always based on past economic cycles or seasonal fluctuations. So save up surplus during a positive cash flow cycle, and this way when you experience a negative cash flow cycle, you have a cushion to fall back on.
- Automate regular payments.
Sometimes you may not pay your vendors on time simply because you don’t have the time to sit down to write checks. You may be preoccupied with putting out fires in your business and unintentionally let your invoices pile up.
Such potential problems can be avoided by setting up automated online payments. By setting up an automated payment system, you not only free up your time and attention, but you don’t pay vendors too early or too late, but just on time.
- Use the latest payroll systems.
Another way to manage your cash better is to upgrade your payroll process. Instead of doing it all yourself, taking away time from running your business to calculate federal, state, and voluntary withholdings for your small group of employees, hire a full-time bookkeeper, use state-of the-art software, or outsource payroll to a third party.
- Be careful about providing generous credit terms.
Many small companies run into trouble by providing generous terms for collecting receivables. They do this to build customer goodwill and attracting people who are not willing to pay in full up front. Try your best to limit your 30 or 60 day contracts. Avoid 90 day contracts. And only provide these generous terms for your best customers. Yes, you may have more business this way, but you will have negative cash flow problems.
Why You Must Focus on Cash Flow Management
Cash flow management is something you must get good at to stay in business. According to an article by Allen Taylor on better ways of managing cash flow, “Cash flow is important for all businesses, but it is critical for early startups. If you cannot manage your cash flow within the first year, you will likely not survive the second year.” His advice is backed up by research done by the Small Business Administration that shows that one of the primary reasons small businesses fail is because they don’t manage their cash flow well.