Cash flow is something every startup and small business should prioritize. Business owners need to be proactive about their finances regardless of what the market is like. Depending on how you manage cash flow, you can either grow your business or cause it to fall.
There are simple ways to manage your cash flow correctly even with all the other things you have to take care of in your business.
What Is Cash Flow Management?
Cash flow is the measurement of how much cash or money is moving in and out of your businesses within a set time period. For example, your business likely brings in money from loans, return on investments, and sales. These items are cash that flows into your business.
Your business likely spends money on things such as services and supplies including loan payments, taxes, utilities, and other bills. These items are cash that flows out of your business.
All the cash that flows into and out of your business needs to be managed, which means that cash flow management is the process you carry out to track that money.
Why You Need to Know How to Manage Cash Flow
Cash flow is the life force of small businesses and startups. Without adequate cash, your business won’t survive because cash allows you to cover the monthly expenses for your business or expand your business to help it grow.
According to a study conducted by U.S. Bank, 82 percent of businesses fail due to poor cash flow management.
If you learn how to manage cash flow properly, you can really start focusing on growing a healthy business and improving your profit and margins.
The Basics of Cash Flow
Learning about cash flow can help you make sure your business has enough money to keep operating. Here are some basic terms and concepts you should know about cash flow.
There are two types of cash flow:
Positive Cash Flow
Positive cash flow occurs when the cash coming into your business (cash from sales, accounts receivable, etc.) exceeds the amount of cash leaving your business (standard monthly expenses, employees’ salaries, etc.).
Negative Cash Flow
Negative cash flow occurs when the outflow of cash in your business is more than the cash you have coming into your business.
This is usually a sign of trouble for your business. There are ways to fix negative cash flow in your business to get it to become positive again, which we address later.
Cash Flow vs. Profit
Good profits do not always equal positive or good cash flow, and knowing if you earned a profit differs from knowing what happened to your cash.
You must look at other financial figures besides your profit and loss statement to help you understand your cash flow. Other financial figures that factor into your cash flow include inventory, accounts payable, accounts receivable, debt service, and capital expenditures.
Managing cash flow correctly requires a clear focus on each of these financial figures. Having a positive cash flow is required for you to generate profits because you need a decent amount of cash to pay your team members and suppliers.
This allows you to make goods and sell them to help you generate a profit, but if you don’t have enough cash to make goods, then you don’t get the profit.
10 Cash Flow Management Tips
Here are some important tips to help you manage your cash flow more effectively:
Stay on Top of Your Cash Flow.
Software and accounting tools make it easy to keep track of your cash flow. You can reconcile your accounts and generate reports to see key trends in your spending and cash flow from wherever you are.
Get Help Managing Money.
Managing money is time consuming and complex. Founders should focus their time on growing the business rather than managing money. Hire a CFO or accounting company to help you with money management.
You may be great with money, but with all the other things you have going on as a founder, you are likely to make costly mistakes within your cash flow budget.
Delay Payments to Suppliers or Vendors.
Check the incentives that your vendors or suppliers have for paying early.
If they don’t have any incentives, ask them how late you can pay without the threat of late fees. This allows cash to stay in your account longer until the vendor absolutely needs to be paid.
Keep Up With Invoices.
Make sure you send your invoices to clients when the work is finished or the products are delivered. Before you send the invoices, make sure you have the right contact information for the person you are sending them to so they don’t get lost.
You may also want to make sure your invoices are easy to read with clear due dates, amounts owed, and where to submit the payment method. You can also email invoices or use an automated invoice system to help you get paid on time.
Use Mobile Payment Solutions.
There are many mobile payment solution options that help you get paid faster. If you provide services or sell products in an office or at someone’s home, you may consider using mobile apps and tools to get paid then and there.
Sell Unused Assets.
Try selling equipment of inventory you no longer need or use to generate quick cash. If you're truly no longer using certain assets in your inventory, why hold onto them?
Offer Various Payment Methods.
By offering your customers various payment methods, you will be able to capture every sale you can to increase the cash flow you have coming into your business.
Think about ways you can cut the costs or expenses your business has. Try to focus on recurring payments to see if you can cut back on payroll, rent, utilities, or any software that's not essential to your day-to-day business efforts.
You can also check with your lender to see if you can renegotiate loan terms.
Review Credit Histories of Customers or Clients.
Having customers who want to purchase your products or services is important, but it is more important to make sure they are qualified.
Check the credit on new clients or customers that apply for credit and flag anyone who has a history of slow payment. If you choose to deny a customer, do so graciously and invite them to complete the transaction in cash or to reapply at a later date.
Try to also get rid of unprofitable customers who cost a lot to maintain and don’t add to your bottom line.
Boost Your Sales.
Focus your efforts on sales to make sure you have money consistently coming in rather than going out. You can do this by making sure you have a proper sales team structure and by taking the time to hire the right sales associates.
5 Cash Flow Mistakes Small Business Owners Make
It is quite probable that you will make mistakes when starting your business. However, it is essential to review the mistakes other businesses have made to avoid making the same costly mistakes they made.
Here are five common mistakes that small business owners make when it comes to cash flow:
Overestimating Sales Forecasts
Optimism is an important trait of all successful business owners. It is a critical trait for entrepreneurs to overcome obstacles and persevere.
However, optimism should not cloud a new business owner’s judgement when it comes to cash flow. Many new small business owners overestimate their sales forecasts because they think each interested looker will actually make a purchase.
This is not the case, and it’s unrealistic to expect that every interested prospect will become a sale. And without an accurate report, you won't know what forecasts are actually realistic.
To overcome this mistake, work with a good business mentor to conduct revenue forecasting for the first few years your business is open. Objective intuition and applying quantitative forecasting methods based on historical evidence and real numbers will help you to more accurately predict future sales.
Many new entrepreneurs follow the sentiment that “it takes money to make money.” While this is partially true, it shouldn’t lead to exorbitant overspending in the first few months of the business. Costs need to benefit your company’s profitability in some way.
Consider the cost-benefit of each and every expense if you want to help your business make money. Impulse spending may cause your business to fail early if you don’t recover the costs on your investments.
You can really damage your cash flow early by being passive about collecting payments from your customers or clients. Small business owners who don’t develop and apply late payment penalty policies often get taken advantage of.
When clients don’t expect to hear from your company when their payment is late, you will likely be the last vendor they pay.
Not Tracking Cash Flow
Businesses that don’t track their day-to-day cash flow may find their company in an unfavorable position. Without tracking inflow of revenue and outflow of expenses, your business could fall behind with its bills.
Not Protecting the Company’s Cash
Problems with cash flow are a reality for most businesses regardless of how many protections they have in place.
This isn’t a large problem for businesses that have a cushion of savings to draw from. If a company has no reserves in place to cover unexpected cash flow stalls, then it could be a large problem for their business.
5 Cash Flow Management Tools
Cash flow management tools can help you greatly improve the way you track and manage your cash flow. Here are five simple cash flow management tools to help you.
Quickbooks has a cash flow management tool that offers easy to use cash flow forecasting and actionable tips and insights.
You can import your cash flow data, and it syncs automatically for cash flow analysis on one page, rather than on multiple spreadsheets.
Pulse helps you manage your cash flow by allowing you to enter your cash flow projections and automating recurring entries. You can view detailed transactions and adjust your past transactions.
Pulse can also automate the growth you anticipate, and it allows you to view multiple scenarios so you can easily see what happens to your bottom line under certain circumstances.
CashAnalytics is a forecasting tool for cash flow that gives you an accurate idea of the cash you have if you are a large or multinational company. The automation features help save treasury and accounting teams time while ensuring quality.
PlanGuru provides its users with forecasting and data based on current cash flow by integrating with accounting platforms. This tool is best for small businesses to help them make sense of complex financial information.
5. Wave Invoicing
Wave Invoicing is free and easy software that can be customized to fit the needs of your business. You can make professional invoices quickly, and the software even allows you to automate recurring invoices and credit card payments so you don’t have to chase clients down for payments.
Startups and small businesses learn early on that cash flow is one of the most important things that provide a business with flexibility and maximum opportunity.
Profits are meaningless without cash, and most companies need to be profitable to continue growing and operating their business.
Ensure that your business is on the right track by managing your cash flow efficiently.