The Ultimate Small Business Guide to Managing Cash Flow

Profit vs. Cash Flow

To organise your business’ finances successfully, you must be aware or the difference between making money and managing money. There are several financials that you need to factor into your cash flow, including:

• Expenditures
• Accounts receivable
• Inventory accounts payable
• Debt service

You can’t take your profit and loss statements when equating cash flow.

Profit, also referred to as net income, is the surplus amount left from revenue after a business has covered all of its costs.

Total revenue – total costs = profit

By contrast, cash flow refers to the money that is flowing in and out of your business each month. Positive cash flow is what you want, it is needed to generate profits and it means that the money coming into your business from accounts receivable and sales is more than the amount of money leaving your business through accounts payable, salaries etc.

Negative cash flow on the other hand, puts businesses in the danger zone – as if less money is coming in than going out, your business risks being overdrawn, meaning you will need to find money to cover any business overdrafts.

Importance Of Managing Cash Flow

 

“For every business, the cash flowing into a company is essential for covering the day to day expenses necessary to operate a business. It keeps lights on and doors open; cash flow is truly the life blood of a business. Unfortunately, it’s not uncommon that companies of all shapes and sizes have to slow business growth due to lack of cash flow needed for expansion.” – Marco Carbajo, Small Business Administration 

Inadequate cash reserves are the primary reason behind businesses going bust in their early stages. More and more we are seeing the impacts of negative cash flow on young, particularly businesses that are seasonal or in their 1st – 2nd year of trading.

For seasonal businesses, cash flow management is crucial. If your business’ sales decline during certain periods of the year, you’re more likely to face irregular cash flow, so addressing cash flow requires diligence and careful prior planning.

Startups also face difficulties with cash flow – in the initial stages of business there are huge costs and expenses to be paid. At this point, you may not have many sales or regular customers bringing money into the business.

1. Keep The Focus On Cash Flow Management

Many businesses make the mistake of not having a solid cashflow plan from day one of opening, even though they have profit margins forecasts for years to come. Put the focus on cash flow, as when your cash flow is in order, your profit will be too.

2. Increase Sales

An obvious solution but not always easy to achieve. Small businesses should focus on customer acquisition to boost sales.

3. Use Cash Flow Worksheets

A cash flow worksheet helps businesses prepare statements of cash flows. It is an optional tool that does not form part of formal accounting records for a business.

Consisting of two sections, the worksheet gives explanations of changes in balance sheet accounts and cash effects.

• Balance sheet effects: Used to analyse changes in business account balances
• Cash effects: Used to collect information that will be disclosed in the statement of cash flows

4. Issue Invoices Quickly

Ensure you invoice clients as soon as their work is completed. Waiting to send out invoices weeks after the client has finished their service will only delay the process for cash arriving in the account.

5. Make Payments Easy For Customers

Avoid being paid by cheque payments, as this often creates a delay before the money arrives in your business’ bank account. Online payments are ideal and easy for customers to make quickly.

6. Encourage Fast Payments

Ensure you keep your business’ credit requirements are strict and think about offering customers early repayment discounts. Although this might impact your business’ profit margins, it will help with managing cash flow.

7. Use Technology (accounting softwares)

In this day and age, we are lucky enough to have innovative technology that can make managing cash flow much easier. Cloud-based accounting can be a great time saver for businesses – all of the accounts data can be accessed easily and is backed up securely.

Quickbooks uses software that keeps every aspect of accounting covered. Helping over 3.6 million businesses across the world, you can benefit from a free 30-day trial when you sign up.

8. Extend Supplier Payables

When you order business supplies and discuss pricing, ask if you can extend your payables window from 30 days to 60 or 90 days. Businesses can also negotiate dates for payables – instead of paying at the beginning of the month, ask if you can pay later or towards the end. By getting the best deal you will benefit from easier management of cash flow.

9. Have Someone Monitoring Cash Flow

Many small businesses opt to allocate a person dedicated to tracking cash flow, particularly where their income stream is unpredictable. Train an employee to keep an eye on the money going in and out, to ensure there is always enough cash in the account.

10. Set Cashflow Forecasts & Targets

Cash flow forecasts can help businesses plan how much cash they’ll need in the future, typically covering up to 12 month periods. Use a cash flow forecast to understand whether your business is meeting expectations and to budget for upcoming expenses.

There are 3 components to a cash flow forecast:

• Estimated Sales

Estimate your likely sales for weeks or months to come. If your business has been trading for longer than a year, you can analyse your sales history taking note of seasonal patterns and periods of lower activity.

Alternatively, if your business is just starting up – utilise data from industry experts and suppliers to make predictions.

• Projected Payment Timings

After establishing estimated sales, include when you expect all payments to be received – be sure to include room for delayed payments.

• Projected Costs

The final stage of the forecast is estimating your predicted outgoings. Look at both your business’ fixed and variable costs.

11. Securing Loans

Short-term cash flow loans can help to accommodate businesses going through periods of negative cash flow. Both a merchant cash advance and a cash flow loan can help businesses accomplish their goals during financial distress and uncertainty.

A cash flow loan will allow you to receive a loaned amount of money, paying it back with interest in scheduled monthly repayments over a pre-agreed period.

12. Build Up A Cash Reserve

A cash reserve provides as a safety net needed to manage unexpected events or financial emergencies. For small businesses in particular it can be difficult to build a large enough cash reserve, but where possible, building a cash reserve puts your business in a position of greater strength.

13. Keep Business & Personal Finances Separate

Keeping your business finances and personal finances in separate accounts is essential to maintaining control, managing business performance and analysing money generated.

Taking Control Of Your Business’ Cash Flow

At some point you may experience shortfalls where you lack the cash to cover all business costs and bills, this does not mean your business is a failure, or that you are failing as a business owner.

Every entrepreneur experiences periods of deficits at some stage in their business ventures. By learning how to manage your cash flow better, you can spot problems at an earlier stage and make appropriate changes before getting in too deep. Always remember, cash is king.