business
BEST BUSINESS CASH FLOW PRACTICES by Sean Plummer
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business’s cash flow is its lifeblood. Should it stop, so does the business. Effective cash flow management is about knowing when to invest in growth, how to predict shortfalls, and establish trust with bankers and suppliers. Common issues that mar this management include expanding too rapidly, poor accounts receivable tracking, and giving customers overly generous credit terms. Effective strategies for cash flow management allows you to cover payroll, vendor invoices, and interest on bank loans, all while leaving enough money for controlled growth. Fortunately, there are many practical ways to control cash flow that can help you weather both small daily storms and future financial tsunamis.
Brush Up on Your Accounting
Increase Sales and Cut Expenses
Yes, you have a CFO for a reason. But just as it helps to navigate Paris if you parlez français, you can better address cash flow concerns if you can read a balance sheet and know the differences between cash and accrual basis accounting. Similarly, knowing the importance of cash flow to your business can prevent you from getting into a financially poor position from which you may not recover.
Healthy cash flow is aided by a corporate culture that emphasizes bigger profits than spending. Promote a lean business ethic and work on marketing plans that bring more customers into your sales funnel. And, be sure to keep those customers happy once you have them as their referrals can generate additional business.
Make Frequent Projections Paying close attention to data and variables on a spreadsheet lets you make more accurate projections of future monies coming in and out. You can help forecast your sales and expenses (especially big-ticket purchases that might strain your cash reserves) by considering industry norms, averages, and trends. Be sure to compare your projections against your actual performance to gauge their accuracy.
Know When You Should Be Profitable No matter their size, many start-ups operate in the red for years before turning a profit. For example, it took Twitter 12 years to see its first profitable financial quarter. Eventually though, your business will have to start generating profits. Creating a profitability goal can help your staff develop healthy practices around expenditures and budgeting. It can also inspire your managers to work towards generating a certain level of business.
Spot Problems Early Nip money scarcity in the bud. Small financial problems like an unpaid customer invoice can become exponentially larger and more unmanageable if it goes unpaid for longer than was agreed upon. Such problems can, in turn, strain relationships with both your creditors and lenders.
Don’t Delay Getting Paid Invoice your clients as soon as you’ve completed work for them. Make getting paid easy by accepting electronic transfers and making it clear to customers upfront that they will be charged extra for late payments. Conversely, you can incentivize them to pay early by offering discounts. Getting paid faster can reduce the interest you pay on your lines of credit.
Establish Strong Relationships Payment flexibility works both ways. Loyal customers may be willing to pay early if you’ve offered them generous terms in the past, and your suppliers may extend your payment due dates if you have a history of settling your bills on time. This mutual respect can pay off when money gets tight.
Plan for Emergencies No boss wants to hear from employees on payday about where their money is — or have the rental of a new office denied due to lack of funds. That’s why it’s smart to always have reserve cash to get you through (hopefully temporary) crises. An accepted rule of thumb is to have four months’ worth of operating funds on hand at all times. Healthy cash flow is an indicator of a healthy business. Having enough money available to cover your day-to-day is as important as having it available for growth — arguably, even more so. While risk in the form of spending your working capital is at the heart of entrepreneurship, it’s still smart to use these practices to track funds. Remember: your cash flow is the life (of your business)! //
Spring 2023
the EDGE
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