5 Rules for Managing Small Business Cash Flow
Invoicing is the start of the process. To maintain a healthy cash flow it takes more than just a strong revenue source. Once you have made your sale, you need to collect on that sale. Inefficient cash flow management of cash flow can have detrimental effects on a business and its continuity.
Not converting your product or service to cash or convincing your customers to pay can present a cash flow problem which will affect the business' ability to service accounts payable.
Here are 5 Rules for managing your cash flow and getting your invoices paid faster:
1. Maintain accurate and up to date accounting records
Your cash flow is only as good as your accounting and reporting processes. Don't let this get out of control. Ensure that you update your accounting information on a regular basis. This will ensure you have access to your business performance at an overview level.
2. Be firm with your clients and your payment terms
Be direct and fair without allowing your customers to take advantage of you. A well-structured and polite invoicing strategy will usually go a long way. But don't be afraid to take more formal action.
Keep a close watch on your accounts receivable turnover. If it’s trending up, it might be time to step up your efforts at chasing payment. As receivables age it becomes harder and harder to collect on.
3. Simple is always better when it comes to accounting and financial health
If you’re not confident with numbers, hire a professional accountant. Use quality accounting software, so you always know your cash position. The right accounting software will also help you forecast your cash flow for planning purposes.
For example, maybe you're expecting a substantial order next month. How will you know if you'll have the working capital needed to expand on your payroll? Or will you be able to buy the necessary inventory?
Many small business owners find themselves caught out when a large opportunity arises. They are unable to take advantage of it because they lack cash. Don’t be a statistic and let it happen to your business.
What’s more, a reliable accounting system will help you track and report on key business metrics. These include accounts receivables aging, operating margins and inventory turnover. Having a good handle on these business metrics will help you manage your cash like a pro – and take advantage of new opportunities.
4. Don't mix your business and personal expenses or you will have cash flow issues
Understanding your business cash flow and forecasting how it might change is essential. Mixing your business and personal finances can leave you uncertain about business performance not knowing what is and what isn't working.
Therefore, keep business and personal separate. That is the only way you'll know how much cash your company is really generating. Knowing what your business can afford will help you decide on a good salary pay yourself – and use excess cash to strengthen and grow your business venture.
5. Maintain a cash reserve in your bank account
Access to cash is usually a make-or-break situation for any business. The ultimate step to managing cash flow like a pro is to build a cash reserve that you can access when needed. A cash reserve provides the cushion you need to manage unexpected events throughout the day-to-day trading of the business.
Good cashflow management can insulate you from economic cycles and the whims of banks and other lenders. Additionally, you can take advantage of opportunities when they present themselves. It also gives you the confidence and finances you need to grow your business.
Building a cash reserve puts you in a position of strength. It might mean paying yourself a little less in the short term, but in the long term it will put your business on the path to success.
Always ensure you are making your cash flow work for you
“Cash is king” might be a trite expression, but it is absolutely vital for small businesses. Following the five rules above will help ensure that cash serves you – rather than the other way around.
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