Cash flow management is among the most challenging responsibilities of every business owner. It’s exactly what it sounds like: money comes in from sales, accounts receivable, investors, etc., and money goes out in the form of salaries, accounts payable, monthly expenses and payments to suppliers and creditors.
Managing cash flow is not so simple, however. In fact, business failures often result from poor cash flow management. Good cash flow management will maximize the company’s cash flow — equals cash in minus cash out — while minimizing profits that are taxable, which means more cash. Good cash management will make sure cash balances are put to work where the company can benefit most while having access to funds to cover three to six months of normal expenses in case of an economic downturn or other interruption in business.
Managing cash flow gives you freedom to focus on strategic operations. It provides flexibility to weather economic downturns, repay debt faster, invest in research and development, or buy more assets.
Here’s how to get started.
Create a cash flow projection
A cash flow projection details your business’s anticipated inflow and outflow of cash every month over the course of one to three years. (You can find SCORE’s free downloadable 12-month cash flow template here). It’s important to focus on when the cash is received, not when the sale is made. Once you’ve created the projection, review it regularly and adjust it as necessary.
Creating and reviewing a projection can seem daunting, but it may be the single most important part of your business plan because it lets you predict your cash needs and anticipate potential problems. And when you’re seeking growth, a cash flow projection can underscore that your business is a good credit risk.
Collect and deposit receivables quickly
Ensure your customers pay on time. Send invoices promptly and include clear payment terms. For example, note that payment is expected upon receipt of invoice and interest is charged for all payments later than 30 days. Offer discounts to customers that pay early.
Consider investing in a lockbox service to receive all customer payments for immediate deposit into your account. When available, take advantage of electronic ACH payments from customers to speed up collections and use remote deposit to get checks into your account quickly.
Put your cash to work
Make your cash work for you. Keep cash for anticipated monthly payments in a business checking account. Hold larger cash reserves in higher-paying accounts, like savings accounts, money market accounts or other liquid assets that provide a return.
When cash is tight or when experiencing a downturn, eliminate unnecessary inventory, sell any unneeded fixed assets and reduce all variable expenses when possible. Double down efforts to collect debts and settle any customer disputes that are causing payment delays. In extreme cases, consider selling outstanding receivables to a factoring service, which buys receivables for a percentage of their value, collects customer payments and forwards the cash, minus a service fee.
Talk with any suppliers or vendors you owe about flexible financing. Many may permit you to continue paying them regularly, even if payments are small.
Establish a reserve
Most businesses experience ebbs and flow. Many smaller businesses rely on timely daily and weekly payments from their customers. Make sure you establish a reserve fund you can tap whenever critical slowdowns occur so you can meet payroll and other important commitments. Even if you have a line of credit, good solid reserve funding can help smooth the rough periods.
Maintain a strong relationship with your banker
Your banker wants your business to succeed. He or she can review your cash flow projections with you, provide industry insight, help finance your growth, and identify helpful treasury management services and other banking solutions. Review your business’s performance with your banker annually and share plans for the future.
The Huntington National Bank, Member FDIC