Cash flow is king. It is the lifeblood of any business. Often referred to as “working capital,” cash flow is the movement of money going in and out of your business and provides a lens into the health of your operations. If a business is going to survive, owners need to understand best practices to improve cash flow in order to ensure stability.
A business owner may see profitability on their financial statements, but there’s a big difference between profits and cash. For example, haphazard spending may lead to more money going out than coming in, which will lead to a negative cash flow situation, putting the business in a crunch for cash even though it’s profiting from sales.
Similarly, when a business is using accrual-based accounting—where expenses and revenues are recognized when products and services are delivered—it is possible to report positive net income, but then in turn, be unable to collect money owed and fall into negative cash flows.
It’s important to understand the long-term considerations for effectively managing cash flow. The key strategies are: encourage incoming payments as fast as possible, delay money you owe as late as possible, and earn as much as you can on cash balances.
Here’s the top 10 ways to optimize your cash flow:
- Send invoices right away. Even though it’s tempting to put it off, sending invoices immediately after a job is complete or a project milestone is met will lead to payments coming in sooner.
- Set up electronic payment solution. There are a number of online payment solutions for small business to make the transaction more seamless. Set up an online billing program to encourage payments more quickly, and easily.
- Establish terms. Most payments or receipts for sales are finalized sometime after the project or sale actually takes place, unless of course, you’re running a retail business. Establish—in writing—clear terms or timelines as to when you will get paid. This will allow you to better project your cash flow.
- Send reminders. Set up automatic email reminders to be sent to clients five days before the invoice due date. Follow up with a call right after a missed due date to ensure that you will receive payment.
- Enforce late fees. Even if it’s a small amount, include a late fee on past due payments to incentivize customers to pay on time, so you can best manage your cash flow. You may even consider selling your invoices to an outside company for a nominal fee to expedite payment on a customer that is over 60-90 days late.
- Reward early payments. On the flip side, offering incentives to customers who pay early can accelerate payments and better position your business’ operations.
- Reduce inventory holding costs. Keep inventory costs low by forecasting and managing inventory efficiently. You may consider using a dedicated inventory management system to help with projections. Effectively managing inventory will reduce your change of negative cash flow issues as discussed above.
- Delay paying bills. If you can hold off on paying bills within reasonable terms and without penalty, delay paying your bills until they’re due.
- Look into cash sweeping. Some banking laws may restrict paying interest on business accounts, but others may offer a “sweep” arrangement, which is designed to move cash from a company account into an interest-bearing account after reaching a certain threshold.
- Analyze cash flow often. Are your actual numbers on track with your projections? What is your operating cash flow ratio? What is your accounts receivable turnover ratio?
Don’t forget, cash flow is king. Contact me at email@example.com or (805) 963-7811 to put together a cash flow analysis to check on the health of your business. Our Client Accounting Services team offers a number of additional services to assist your business with its financial management, such as bill pay, budgeting and forecasting, financial reporting, bookkeeping, and more. We look forward to helping your business succeed.