Managing Cash Flow

For many entrepreneurs starting a company for the first time, cash flow management is often the last thing on their minds. Most entrepreneurs will focus on things such as developing new products or services, launching marketing campaigns, or even setting up meetings with new clients.

This is part of the reason why about 20% of new businesses fail by the end of the 1st year.

In this article, we will share 10 practical tips for managing cash flow in your business. By implementing these strategies, you can improve your business’s financial stability and ensure that you have the resources you need to grow and succeed in the future.

What is cash flow in business?

When running a business, it may sometimes feel like cash only flows one way (out of your business), but actually, it moves in both ways.

• Cash coming into the business: This usually takes the form of clients purchasing your goods or services. In a case where clients don’t pay at the exact time of purchases, some of your business’s cash flow will show up in the form of accounts receivable in your cash flow statement. If you have more money coming in than going out then your business is in a positive cash flow position, or ‘in the black’

• Cash going out of the business: This would namely be payments or expenses to produce your goods or services. This can include a range of expenditures such as rent or a mortgage which need to be paid back in monthly loan settlements. These would show up in your cash flow statement as various forms of accounts payable. When more money is going out than coming in, your business is at risk of being overdrawn or in debt.

Having control over your cash flow will empower you to spot where your business could be doing better, whether it be in your incoming or outgoing.

Why is cash flow management important?

The lack of cash is one of the primary reasons why businesses fail.

According to Guidant Financial, about 33% of small business owners find it difficult to achieve enough cash flow to keep their businesses from failing in 2023.

Cash is particularly important in some business scenarios, including:

• When starting a business: Cash flow problems are more difficult when launching a business, particularly in the first six months. Money has a tendency to fly out of the company faster at the start when you are still setting up your operations but may not yet have many customers or sales. Suppliers do not often offer credit terms to new companies, worried that they will not have the funds to pay them which increases their financial strain.
• Seasonal work or business: If your product or service is only seasonal (e.g. Christmas-themed merchandise) then having a grasp over your cash flow will allow you to make provisions for the large fluctuations in business and essentially income. Cash flow, in this case, will be vital to keep your business afloat during the off-season.
• Profit does not equal cash: Technically, it is possible for your company to turn a profit even if it records no cash. The reason behind this is that profit is just a concept used in accounting, whereas cash is the amount of available money in your business’s bank account. But remember, profit does not enable you to pay bills and meet your financial obligations. Profit will include assets like accounts receivable (money which is owed to your business by customers) which are not immediately collectable and as such are not able to receive immediate cash. Always make sure you have enough cash in your company’s account to pay for monthly and ongoing payments.

Managing cash flow using a Cash Flow Statement

The most effective way to track your company’s cash flow is through a cash flow statement (or report).

It enables you to get an overall view of all money that has come in and out of your business’s bank account, and basically to understand your company’s cash position (whether it is positive or negative) every month.

Keeping track of your cash position is much more significant and fundamental to keeping your company afloat.

The statement is normally split into three parts:

1. Cash from operating activities
2. Cash from investing activities
3. Cash from financing activities

In all those parts you will be able to identify every cash transaction (both in and out) that has occurred in your business.

Your outgoings will be deducted from your incoming to get your business’s net cash flow.

Why Use a Cash Flow Statement?

• To track where your business’s money is coming in from
• To understand where your business spends the most money
• To get the ‘cash reality of your business, as opposed to the abstract accounting
• To spot a cash inconsistency or shortage and help you plan for future cash flows. The longer you wait to fix a cash shortage the further your business’s cash flow will fall.

Simple methods to prepare a cash flow statement

• Use accounting software: certain tools will be integrated to help you to construct a cash flow statement. If you are unsure how to use it, ask your accountant to assist you with it.
• Find help online: many services are available online to connect you to experts or offer free templates and tools to enable business owners to put together a cash flow statement.

10 TIPS TO MANAGE CASH FLOW EFFECTIVELY

The most important aspect of cash flow management is to understand how much ‘cash in hand’ you can use for your business.

By organizing your business cash flow consistently, you will have an accurate idea of how it should be managed effectively.

Here are 10 steps you can follow to increase your business’ cash flow.

1. Monitor your cash flow on a regular basis

As we mentioned above, it is advisable to prepare a monthly record of your cash outgoings and incomes, at least on a monthly basis.

This will ensure that mistakes and cash shortages are spotted quickly and do not cause any damage to your business.

2. Cut down your costs

Use your cash flow statements to do a cash flow analysis and try to see whether there are any recurring expenses that you could cut back on.

They could be in the form of bills on utilities, rent, payroll, subscriptions, or frequent services.

If you think you need to reduce your expenses, try to cut the costs or negotiate payments where possible.

3. Get your customers to pay faster

Another key to increasing your cash flow is getting your customers to pay their invoices on time. We know this is easier said than done, but there are plenty of practical strategies to increase the likelihood of getting your invoices paid faster. Here are some of our top invoicing tips:

FOLLOW UP WITH INVOICE REMINDERS

Make sure you remind your customers when their invoices are due. Send email reminders a few days before the invoice is due, the day the invoice is due, and a few days after. If they still haven’t paid, give them a call and continue sending reminders. Many accounting programs and invoicing software have built-in invoice reminders that you can automatically send to late-paying customers.

GIVE YOUR CUSTOMERS INCENTIVES

Consider offering a discount to customers who pay their invoices before a certain time. If your invoice terms are Net 30 (due 30 days after the invoice is sent), but you really want your customers to pay within a week of receiving their invoice, offer a small discount. Customers looking for a deal will be more likely to pay their invoices faster, which means you get cash faster.

CHARGE A LATE PAYMENT PENALTY

Another key to successful invoicing is having a strong invoicing policy. Choose a consistent time when invoices are due (for example, due upon receipt, Net-15, Net-30, etc.) and stick to it. You might even take it a step further and include a specific due date to eliminate any confusion. Have a late payment penalty in place for customers who exceed the due date. Not only will this help increase your chances of getting your money, but it will also set you apart as a professional.

When it comes to late payment penalties, be upfront about the penalty, when it will be charged, and how much will be charged. You can often include this in the terms and conditions section on your invoice. Do some research on what a typical late penalty policy looks like for your industry before implementing one of your own.

4. Get cash for your ‘unused’ assets

Inventory is one of the largest business expenses you might encounter. You need inventory to make a profit, but you want to make sure the inventory you’re buying is actually selling. Carefully consider which products sell well and which you have a hard time turning over. Take a look at your sales patterns to see when your busy and non-busy sales times are and order inventory accordingly.

If you have any old inventory that you’re having a hard time getting rid of, consider liquidating the items. Any money coming in is better than no money.

This tip is particularly important if you are looking to make some cash fast. Perhaps your business has some old equipment that is sitting in a storage room collecting dust. Do not let it become obsolete. Consider selling it or renting it out to get cash out of it. This is not only one of the quickest ways to earn cash and generate your cash flow, but it also helps to get rid of unused assets.

5. Obtain a line of credit or a loan

 Use your cash flow statement to forecast your cash requirements and get a line of credit or loan as a safety net against cash flow problems.

Be mindful of the line of credit or loan you get.

Just ensure that whatever money you are borrowing is worth the investment and cost of the loan or credit you are receiving.

6. Reevaluate Operating Expenses

Managing cash flow isn’t just about getting more cash to come into your business. It’s also important to reduce the cash going out of your business as much as possible. Here are four tips for reducing your business’s operating expenses so that you have more cash to spare.

CUT OUT UNNECESSARY EXPENSES

Take a careful look at your cash flow statement and analyze your company’s business expenses. Ask yourself these two questions:

• Are these expenses necessary?
• If they are necessary, is there a cheaper alternative?

Carefully consider your current expenses. Cut out any that are unnecessary and try to minimize the necessary expenses as much as you can. It may seem difficult to do, but you (and your wallet) will feel much better knowing that you’re managing your cash flow and expenses effectively.

STREAMLINE YOUR BUSINESS PROCESSES

Another important aspect of managing your cash flow is making sure your business is running as efficiently as possible. Focus on cutting time, not just costs. Analyze all of your current business processes and judge how efficient the current process is to see if there’s any way to speed up that process.

Maybe that means implementing accounting software to send invoices faster or rethinking your employees’ inventory assembly process. By using time efficiently, you can get more done, spend less on wages, and avoid excessive overtime pay (which can put a huge dent in your business’s cash flow).

PURCHASE MORE EFFICIENT EQUIPMENT

One way to increase your company’s speed and efficiency is to purchase better, updated technology and equipment. While it may cost a bit to purchase the equipment initially, you will save time, which cuts back on wage expenses. This may also lead to increased production or the ability to take on extra projects, leading to more incoming cash.

CONSIDER LEASING EQUIPMENT

If you don’t have the cash to flat-out buy equipment, or you don’t qualify for a working capital loan, it might be worth considering leasing equipment. In some situations, leasing might be a viable solution. You lose the advantage of having the equipment as a fixed asset for your business, but you could gain lower monthly payments, which may be what you need to keep your cash flow in check.

Leasing also means you can hand it back at any point and can quickly change it for the latest model or features.

7. Keep up with your invoicing

Sales and invoices are the lifeblood of a small business. You can’t get paid if you don’t send invoices. It’s as simple as that.

Make sure you stay on top of invoicing your customers. The quicker you send invoices out, the faster the cash comes in. If your current invoicing process is tedious, consider switching to a cloud-based accounting app with attractive, easy-to-create invoices. Software such as QuickBooks Online and Zoho Books both offer great invoicing capabilities that can help you speed up your invoicing process and increase your cash flow.

We recommend designing your own invoice template so that they become easy and straightforward to fill in. You do not want something that will make invoicing your clients too difficult or cause you to make mistakes.

Another suggestion is to send the invoices by email so that they do not get lost in the post and get to your recipient as quickly as possible. It also makes chasing overdue invoices much easier because there will be records of communication which you may need in the future.