Knowing how to understand your business cash flow is critical. You don’t have to be an accountant or have an MBA in finance to understand the basics. Even if you are using a bookkeeper or a professional accountant you should still have a true understanding of where the numbers come from and what every item means. After all, it’s your business. Understanding your cash flow means you can predict and plan ahead for times when cash flow may be lean.
There are three main components when thinking about how to manage your cash flow:
Accounts Receivable: Money that your customers and clients owe you
Accounts Payable: Money that you owe to your vendor and suppliers
Cash Shortfalls: Not having enough working capital between investing in growth and seeing the profit
Here are 9 tips to help you along the way:
1. Know When Your Business Will Become Profitable
Knowing your break-even point and when you will be profitable will help you work cash flow smart. Give yourself an early goal to work towards which makes projecting future cash flow needs easier. This helps you avoid negative cash flow situations.
2. Maintain Cash Reserves
Keep some cash in the business bank account to avoid cash shortfalls and unexpected business expenses. In a stable business, the cash reserve should equal at least two months of your obligations. If the business is more volatile a reserve of six months will provide a more efficient safety net.
3. Invoice Quickly and Set Clear Payment Expectations
The sooner you send out an invoice the faster you will receive payment. Typically, debtors pay 2 weeks late so if you want to receive a payment within a month set the payment terms to 13 days or less.
4. Encourage Customers to Pay Faster
Offer customers early pay off discounts and incentive to pay off early. Also, establish a written set of standards for determining who is eligible for credit and stick to those guidelines. Being strict on who you provide credit to will help you avoid chasing down clients for account payables.
5. Extend Payables As Long As You Can
Always try to get the best deal that you can on payables. Extend your payables to net-60 or net-90. Try to avoid making payments late so you will not incur unnecessary late fees.
6. Review All Costs And Expenses
Ask yourself a simple question: Is there a good business reason to do this? If the answer is “No”, reconsider the costs.
7. Create A Monthly Budget And Stick To It
Surprisingly most business owners admit to not having a monthly budget. Simply creating a budget and sticking with it will help overall cost control. A monthly budget can help you save a significant amount of money over time.
8. Use Technology To Help You
Invest in professional business accounting software like QuickBooks or Xero to help manage your cash flow spreadsheets. Using secure cloud-based software means you can access your spreadsheets from anywhere. It also makes preparing and filing your annual tax returns a breeze.
9. Be Smart When It Comes To Debt
While debt is common for most businesses it doesn’t have to be scary. Accepting a business loan can be a useful way to grow and maintain your business. For business owners who are seasonal, a small business loan can help hold you over during the slower months. You can also use the funding to purchase equipment, upgrade an existing business space, or full fill orders. Marketing, inventory, and staffing expenses are necessary when working towards a profit. The most important factor is to make sure that when choosing a business loan the return is greater than the investment. Ask your accountant to help you secure a trusted funding solution or contact us today for free loan consultation.
The information and insights in this blog post are provided for educational purposes only and do not constitute financial advice from Merchant Funding Solutions Inc. Please consult your financial advisor before making any business financing decision. For information about Merchant Funding Solutions products and services, please visit the Merchant Funding Solutions FAQ page.