The success of a business may be more elusive than expected. While your business may appear to be successful under the guise of profits, it may actually be in danger without stringent cash flow management practices.
A business that dispenses more cash than it accrues may be fated for bankruptcy despite demonstrated profitability. Nearly a majority (82%) of small businesses that fail, report problems with their cash flows.
As a factor of their success, it’s important that businesses track how funds move to understand their cash flow:
- Positive cash flow: when the cash funneling into your business is more than the amount of cash leaving your business.
- Negative cash flow: when the amount of cash leaving your business is greater than the amount of cash coming into it.
Businesses should not only understand but also manage their cash flows to better direct cash inflows and outflows.
By using the following tips, businesses may maintain a positive cash flow to generate profits and growth.
1. Maintain Detailed Financial Records
Businesses should keep detailed records of the inflow and outflow of funds to maintain a positive cash flow.
The figures on your profit and loss statement don’t provide the full picture of your business’s performance. Many financial factors influence your cash flow, which makes keeping thorough records across the board important:
- Accounts Receivable
- Accounts Payable
- Capital Expenditures
- Debt Service
These financial obligations influence your cash flow. For example, it’s necessary for you to have enough cash to pay your employees and your suppliers who provide your inventory. Through selling goods, you may generate a profit. If you don’t have the cash to pay for your inventory, you can’t make a profit.
Detailed records enable you to determine your business’s cash flow—a key indication of its health. A software solution such as Planning Maestro may help you to stay on top of your business’s financial performance.
By normalizing data from several systems, the platform enables thorough assessments of businesses’ performances. Amongst other features, the tool allows users to create specific reports such as revenue and sales by product.
A high degree of visibility into your operations is valuable. By understanding how money moves through your business, you can structure it to have a positive cash flow to grow and increase profits.
2. Keep Cash Flowing
Businesses should consider methods to encourage timely payments to promote a positive cash flow.
Whereas you create revenue by invoicing a customer for products or services, the collection of that money on that invoice produces cash. To improve your monthly cash flow, you may want to expedite the time for collecting receivables.
One way to accelerate the receivables collection process is to promptly send invoices. This may lead to quicker repayment, increasing the amount of cash that you have on hand.
Another option to increase cash flow is by incentivizing repayment. You may consider offering discounts or loyalty bonuses to customers who pay earlier than billing cycles typically require.
This may impact your profit margins. However, it may also improve your cash flow management.
Suppliers may similarly offer these benefits. Inquire and take advantage of opportunities to reduce your costs with suppliers. While this has the potential to increase your cash on hand, it may also lead to a cash flow shortfall if mismanaged.
There are additional opportunities to accelerate the receipt and processing of receivables:
- Invest in a lock box service: facilitate quicker payment from distant customers with lock boxes — post office boxes serviced by banks to enable quicker payment processing.
- Ask customers to pre-authorize checks: this enables banks to draw against their accounts at timed intervals.
- Request that customers use depository transfer checks: banks directly address these checks to a specific person or fund, offering a cost-effective transfer of funds.
These options may help to reduce the amount of time it takes to collect the money from an invoice.
By creating opportunities for customers to promptly pay, you support a positive cash flow for your business.
3. Manage Expenses
Businesses should closely manage their expenses to ensure that the amount of cash funneled into them exceeds the amount that leaves them.
You will likely incur expenses throughout the month from office equipment to employee training. If not carefully tracked, these ordinary but not necessary expenses may compound quickly.
To maintain a positive cash flow, track expense claims submitted by employees throughout the month. If necessary, be prepared to cut down on expenses to support financial stability.
If you practice fiscal discipline, your employees are likely to follow suit. This helps you to maintain an ideal balance between expenditures and revenues.
Another way to encourage a positive cash flow is to substitute fixed expenses with variable ones whenever possible.
For example, is it possible to rent rather than make a purchase? Is there an option to review rather than enter into a contractual obligation?
The flexibility offered by variable expenses is valuable. It enables you to scale based on your needs. If you need a greater amount of cash one month, you can easily reduce costs. If you have a greater flow the following month, you can expend more.
A disciplined approach to expenses in addition to variable options may help you to achieve a positive cash flow.
Control Your Cash Flow
A positive cash flow is a critical factor in a business’s success.
It’s important to maintain detailed financial records to track how cash moves through your business. This knowledge helps you to structure your business to produce a positive cash flow.
You may want to incentivize timely payments from customers. This increases the amount of incoming cash, which promotes a positive cash flow.
By diligently managing expenses, you may identify unnecessary costs to help maintain a positive cash flow.
Kate Russell is an Editorial Associate for Clutch — an Inc. 1000 private company that helps decision-makers determine the best B2B service providers to solve business challenges. She leads accounting research and content initiatives.