5 Strategies for Better Cash Flow
A business' cash flow ebbs and flows like the ocean tide. Stating what is perhaps obvious, when money comes into the business, cash flow increases; when bills are paid and money goes out, cash flow decreases. Sounds simple enough, but poor management of cash flow can undermine business success. Here are five strategies that may help your business improve its cash flow.
1. Distinguish between sales and cash flow
Bringing in sales does not necessarily indicate that a company has the funds on hand to pay bills when they're due. Sales do not always equate to cash in the bank; it is necessary to collect payment on those sales in order to turn them into cash.
Understanding cash flow is vital to:
- Staying in business. If a company becomes delinquent in paying its bills, creditors can force it out of business. Not paying certain bills, such as employment taxes, can result in 100 percent personal liability for owners, even if the company goes under.
- Enjoying good business credit. Failing to pay bills timely can hurt a company's credit rating. This can result in being unable to obtain loans or, if able to get a loan, having to pay higher interest costs for borrowing. It can also potentially mean losing business because companies can check others' credit ratings when making business decisions.
2. Look backward
Past experience with cash flow can be a sign of a company's solvency and can help to dictate future cash flow actions. Looking back means preparing a cash flow statement covering a set period (for example, the prior quarter ending June 30, 20XX, or the prior fiscal year ending September 30, 20XX). Technically, a cash flow statement tracks income from three sources: operating activities, investing activities, and financing activities.
Cash flow statements can be easily created through accounting software. The importance of the cash flow statement is not its creation but analysis of it.
- Where is cash coming from each month?
- What is draining cash each month?
- How is cash flow changing month over month?
3. Look ahead
Make cash flow projections for the next 12 months to help ensure sufficient cash to pay projected expenses. Forecast what you expect sales to be, as well as the sources and amounts of cash to be paid out. Of course, forecasts may not come true, but they are generally a good indication of where the business is headed and whether changes in business practices may need to be made.
Consider using tools to monitor cash flow. These tools look into your accounting solution and keep tabs on your bank balance, due dates of accounts payable, and other information vital to cash flow.
4. Change customer payment and collection strategies
Speeding up the customer collection process typically enhances cash flow. Instead of billing for goods and services, make it easy for customers to pay immediately by check, credit/debit card, or electronic payment options (e.g., PayPal). For example, authorize employees to accept payment on the fly with mobile devices. This will put sales on an equal footing with cash flow.
If you must invoice for goods or services because of industry practices or other reasons, review your collections policies to accelerate payments. For example, bill immediately, rather than at a set time each month. Follow up on delinquencies faster, and don't hesitate to reach out personally to slow-paying customers, observing the rules in the Fair Debt Collection Practices Act.
5. Change business income and expenses
Two ways to improve cash flow are: get more income (inflow of cash) or reduce expenses (outflow of cash). Of course, this is easier said than done. It is essential to review the cash flow statement in order to discern potential areas in which changes should be made. Then review the company's:
- Business plan. You may need to make strategic changes to the business, such as dropping unprofitable lines or eliminating specific services.
- Budget. You may want to revise your budget, reducing spending for certain variable costs (e.g., marketing or travel).
- Customer list. While you may be focused on growing your business by gaining new customers, you may also need to cut ties with customers that create cash flow issues for you by continually paying their bills slowly.
Cash flow sounds simple, but managing it wisely is a complex endeavor. Business owners should work with their CPAs and other financial advisors to better understand where they stand with cash flow, and the steps that can be taken to improve it.
About the Author
Barbara Weltman, Small Business Expert
Barbara Weltman is a tax and business attorney and the author of J.K. Lasser's Tax Deductions for Small Business as well as 25 other small business books. She has been named a Small Business Influencer for five years in a row.