Cash flow management is one of the biggest challenges small businesses face in their day-to-day operations. Research from the Small Business Administration has shown that only half of small businesses make it past the five-year mark, and running out of money can surely contribute toward this.
Fortunately, there are some straightforward steps business owners can take to improve their cash flow.
Develop a plan for cash flow management
Cash flow is defined as the amount of money coming into a business. If your revenue exceeds your expenses in a given month, then you have a positive cash flow for that month.
The reason why cash flow is so important is because it tends to vary from month to month. Cash flow is constantly being affected by expenses, some of which are not paid on a monthly basis. Other factors that could affect cash flow are late payments, low sales, seasonal slumps, and profit leaks.
Since cash flow tends to fluctuate, business owners should get in the habit of effectively managing business revenue and expenses. If you don’t know where to start, the Small Business Administration has templates to help you better track cash flow. You can also use online software to keep track of everything and set up regular meetings with your financial team to review the numbers.
Stop spending money in an effort to lower your tax burden
"Sometimes business owners feel like lowering their tax burden takes precedent over everything else," says Eric Nisall, accountant and founder of South Florida-based accounting firm, Accountlancer. Because of this, some business owners will spend primarily for the sake of lowering their tax liability.
While there's nothing wrong with lowering your tax liability, Nisall warns that spending money unnecessarily in an effort to lower the tax burden leaves businesses without enough cash to handle necessities and emergencies.
Find better systems for receiving payments
Sometimes cash flow management issues are a result of a business not receiving payments for their goods and services. Fortunately, there are ways to fix this.
One consideration business owners may need to take is reevaluating their payment structure. For example, they can find ways to have customers and clients on a monthly retainer package instead of having them buy one-off products and services.
Auto-invoicing and auto-billing can also be beneficial in helping business owners receive payments. Automatic invoicing refers to using accounting software that sends invoices for you. Many current accounting software solutions today can also send automatic reminders if payments haven't been received by a certain date.
Auto-billing refers to clients and customers agreeing to be charged automatically on a recurring basis. This works best for retainer services, and services like PayPal or most e-commerce systems can do this for you.
And finally, business owners may want to consider invoicing more often. For instance, instead of invoicing once a month, they may want to consider doing it on a bi-weekly basis. This helps ensure that there's always cash in the business account.
Review your expenses regularly
Just like people who manage personal budgets should keep an eye on creeping expenses, so should business owners. If business owners are not careful, expenses can creep up over time and possibly even overrun a business.
One way that business owners can audit their expenses is to see whether a certain expense is producing enough return on investment ROI to actually keep it. Granted, if you just invested in new software or a new hire, you'll need to give it some time before you know the answer.
Business owners should also take time to thoroughly consider any potential investments and expenditures. For example, do you need a new website now or can it wait? By thinking an investment through rather than spending and figuring out how to pay later, business owners can mitigate future cash flow management issues.
While cash flow issues can be a leading cause as to why businesses fail, there are ways to stay on track with your finances. By using the tips outlined here, you can better manage the cash in your business over time.