Cash Flow: The Lifeblood of Every Small Business
By Connie Certusi | July 4, 2011
Cash flow is the lifeblood of any small business and how it's managed can mean the difference between your company's success or failure. Having ample cash on hand will ensure that your suppliers, employees and other vendors can be paid on time. It also allows companies to invest cash back into the business in order to generate additional revenue and profit and, most importantly, improve their bottom line.
Let's take a closer look at how cash flow management can affect small businesses and review how your business can take control of and better manage its cash flow immediately.
Setting up for Proper Cash Flow Management
Preparing accurate cash flow projections on a regular basis is one of the most important things a small business owner can do, as it can raise red flags to potential problems before they arise. Small business owners can start their cash flow projection by adding cash on hand at the beginning of the period with other cash to be received from various sources. However, it is crucial that other factors are also accounted for, including upcoming cash outlays like rent, inventory, salaries, benefits, taxes, office supplies, advertising, etc.
Better Manage Your Small Business Cash Flow
There are two key areas to analyze for better management of cash flow: receivables and payables.
If small business owners got paid immediately following a sale, cash flow would never be a problem. Unfortunately, this rarely happens, but small business owners can still improve their cash flow by better managing their receivables.
Because cash is such a vital asset to all businesses, there are a number of things that small business owners can do to help facilitate getting customers to pay in a more timely fashion:
- issue invoices promptly and follow up immediately if payments are slow in materializing
- offer discounts to customers who pay their bills quickly
- offer several different ways for your customers to pay you
- track accounts receivable to identify and avoid slow-paying customers
Expenses must be carefully watched when managing a growing company, as strong sales growth can conceal underlying problems. If expenses are growing faster than sales — or even if they are not — payables should be examined carefully and methods to better control them should be identified:
- make payments on the last day they are due to retain the use of funds as long as possible
- keep an eye on sales and expenditure patterns and selling and billing cycles
- maintain good knowledge of suppliers and understand who offers the best terms and pricing
- manage and track inventory levels
What is the Best Way to Take Control of Your Cash Flow Management?
Accounting software solutions for managing all financial records and cash flow on a daily basis can be beneficial to small business owners.
Even if the business is profitable, a company can close down because of a cash shortage. With the right accounting system, small businesses can:
- quickly issue professional invoices with detailed and accurate information
- reduce delinquent payments by offering ways to electronically send and receive money
- accept credit card payments online for easy, on-time payment
- access cash projection and customer aged summary reports to understand what monies are owed to you and what your cash position looks like at any one time
- easily track inventory to reduce waste and keep tabs on your inventory levels
- establish a preferred suppliers list that identifies previous pricing for materials or goods purchased
- forecast sales so you can plan ahead and be aware of customer buying patterns
- pull information directly from most banks and quickly cross-reference every transaction
However you track it, cash flow is the key to your business' success, and having the right system in place will help improve your cash flow and boost your bottom line!