5 Tips to Help a Business Avoid Cash Flow Problems
Managing cash is one of the most important functions of a business. Without access to liquid capital, a company may lose the ability to act quickly on investment opportunities or handle unexpected events. To keep your company healthy, consider these five tips to help a company avoid cash flow problems.
Provide Enough Coverage for Startup Costs
Prior to establishing a consistent revenue stream, new businesses need to fund their initial operations. During the startup phase, the need for liquidity is essential, as there will be unanticipated expenses. Even the strongest business plan may not account for every possible expense scenario. That's why it’s important to be able to rely on an initial capital investment. Otherwise, a company may not have a chance to move past the startup phase and prove its worth. To estimate how much cash is needed, a startup cost calculator helps to ensure some of the more common expenses won't be left out of a business plan. Organizations such as SCORE that specialize in small businesses can also help establish a business plan, including startup capital requirements.
Maintain a Cash Cushion
Much like a personal budget, small businesses should keep a certain amount of cash on hand in case of emergencies. Maintaining adequate liquidity is important, but reserving too much cash may cause businesses to miss out on profitable investment opportunities. Industry or regulatory standards may also play a role in the determination of a minimum cash reserve.
Track the Cash Account
A statement of cash flows illustrates how much cash goes in and out of the business each period. More extensive tracking can also be achieved via a cash journal, which is an even more detailed record of company transactions. To gain awareness of how money is being spent, reports should be reviewed and exceptions to normal expenditures noted. Customized cash flow reports may be designed through a cloud accounting system.
Reconcile Cash Accounts to Bank Statements
Month-end cash balances should be reconciled to an external source like a bank statement. Balances should be reviewed each month, and any discrepancies should be investigated. Separation of duties should also be established between those who handle cash and those who record transactions to mitigate misappropriation or employee fraud.
Enforce Late Payment Terms
Once a customer base is established, make sure payments are received on time. Late payments affect the cash cycle and may cause companies to find themselves unable to pay their own bills from vendors and suppliers. To reduce cash flow problems, follow up with late customers on a timely basis, and enforce the late payment terms written in to contracts.
Discovering the best ways to maximize cash flow is one of the important steps when setting up a new business. As an organization continues to grow, cash flow should continue to be monitored. Striking a balance between investing cash in business opportunities versus maintaining a liquidity cushion for unexpected events will help a company weather the ups and downs of the business cycle.