Cash flow is the life blood of any business. These accounting and cash flow management tips can help keep your business healthy and sustain profitability.
Being a business owner comes with challenges, no matter what industry you’re in. Managing your cash flow is definitely one of these challenges! Poor cash flow management and accounting will quickly put you out of business. When starting a business, it’s vital to understand how to implement a good cash flow management strategy, including:
Know your break even point
Incentivising your customers for making early payments
Schedule payments on different days of the month
Cash is king - the importance of keeping reserves
If you want to find out more about these and other small business accounting tips, keep scrolling. They will make your life as a business owner easier and your path to success more likely.
1. Know your breakeven point
Merely breaking even is not enough for a business owner, you want to make as much profit as possible. This all begins with setting your financial goals, to know exactly how much money you need to make in order to become profitable.
Rather than doing a rough estimate of your finances, calculate it as accurately as possible to set your business goals through the pricing of your products and services. This will allow you to estimate how a price increase or decrease will impact your business’s bottom line - or how to manage existing overheads and reduce your breakeven point to match your strategy.
2. Send your invoices immediately
If you don’t invoice your customer, they will not pay. As opposed to waiting to send them the invoice, get it to them as quickly as possible to avoid cash flow issues. Some customers might even respect your business for being proactive, and pay early.
Send recurring reminders to your customers until the invoice has been settled. Remember that you do not need to feel bad when it comes to collecting, it’s nothing personal. It’s business, and you need cash flow to run your business.
3. Incentivise early payments
You can send your invoices as early as you want, but sometimes customers don’t pay when they are supposed to. However, there are things you can do to encourage your customers to pay as soon as possible, such as offering them discounts on an early payment.
It may not encourage everyone to pay early, but some people will definitely take notice and many will love getting extras before paying the late fees. This will help you increase your cash flow on a regular basis and pay your own bills as soon as possible.
4. Lease equipment
One of the most effective ways to help manage your cash flow is to decrease your expenses. But that’s a lot easier said than done, right? Some expenses are just inevitable. That’s why you need to come up with clever ways to lower your operating costs and overheads. Depending on what kind of business you have, the equipment that you use in your day-to-day operations can be one of the biggest expenses. You may not be able to run your business without equipment, but you may have the option of leasing some of the equipment like vehicles and computers.
5. Create a payment plan for customers
Cash from transactions fuels your business. But if you run a service as opposed to selling a product, it may take some time to receive the money, at least until the service is considered complete by both parties. Consider setting up a payment plan to ensure a steady flow of cash, even if it isn’t all of it.
Request a down payment from your customers and once the first payment is made, you can schedule payments thereafter based on the completion of work. This helps you receive money to contribute to the businesses cash flow over a longer period of time, as opposed to waiting for one bulk payment.
6. Make your payments on the final day
When you have cash, hold onto it for as long as possible. That’s why it’s helpful to not only have your customers pay as soon as possible but also to pay your bills as late as possible. Of course, you don’t want to make late payments, you just want to prolong the amount of time you have money in your business account.
To avoid missing payments, schedule them. You can have them scheduled for the last day before your payments are due.
7. Schedule payments on different days
You will hurt your cash flow if you pay all of your bills on the same day of the month. It also complicates budgeting and means you have less access to cash at certain times of the month when you may need it unexpectedly. Try to spread out your recurring payments and schedule them throughout the month, rather than all at the beginning or at the end. Your business account will take less of a hit, but be sure you decide on payment dates that make sense for when the bills are actually due.
8. Keep cash reserves
Just like you should always have emergency cash on hand for your personal finances, your business needs cash reserves. The best thing you can do is have three to six months of business expenses saved up. This way, when you end up going through a slower business period or you have some unexpected expenses, you don’t take on too much pressure to ensure sales are keeping your business afloat.
9. Always be looking ahead
A key part of cash flow management strategy is always having foresight as to how your cash flow situation could impact your business. By monitoring your projected profits and your outside circumstances that could affect your business, you’ll know how your revenue is expected to change over time. Keeping an eye on the economy is important. If there is a recession, you’ll want to be as prepared as possible. Such as the one we are experiencing at the moment.
Small businesses have been hit especially hard during this Coronavirus pandemic. If another recession like this happens while you’re in business, you should prepare for the worst. It’s times like these that you’ll be glad you had those cash reserves to hold you up!
If your business is looking for financial expertise and services to assist you in getting on the front foot and staying there, please visit the Outsourced CFO business page to access their content, as well as contact and services information.