Learning how to manage cash flow is one of the best business skills you could ever learn. Sadly, it’s something a lot of business owners never figure out, which is why so many of them are stressed and stretched to the limit.
They operate from moment to moment with barely enough money on hand to cover the current urgent need. They’re stretched too thin, and often rob Peter to pay Paul. It’s a risky way to do business, and learning how to manage cash flow effectively can make everything so much better.
How well you manage the cash in your business has a direct connection to whether or not your business is likely to succeed or fail, so it is worth your time to get it right.
Being in business is like sailing on the ocean:
- Every boat is in the water together.
- There are boats of all styles and sizes.
- Some boats are in better shape than others.
- Every boat will eventually run into a storm.
It’s what happens during the storm that often determines which boats (businesses) stay afloat and which ones sink. Businesses we work with that have cash when they need it tend to do better than those who don’t when the storms show up.
Sooner or later, you will encounter a crisis in your business, and you’ll need to respond quickly. Having a well-managed supply of cash on hand in those moments can turn a major nightmare into a minor inconvenience.
Because we think you deserve to have a business that is as stress-free as possible, here are 4 tips on how to manage cash flow effectively.
But first, there’s something you need to know: Cash flow is not the same as profit.
This is something we covered recently in another post titled “Why You Need to Know the Difference Between Cash Flow and Profit.” You may want to take a minute and read over that first to avoid any confusion.
How to Manage Cash Flow:
1. Keep your books up to date.
Your cash flow can quickly get out of hand when your accounting and reporting aren’t accurate. Simple mistakes can turn into massive headaches when you overspend thinking you have more money than you really do. Make it a priority to keep your financial information current and correct.
Taking that burden off of small business owners is one of the reasons we created our Cash Flow Management service. Having a good accounting firm keep an eye on your financial situation can remove a lot of stress from your life!
2. Make it easy to get paid.
If your clients have to jump through a lot of hoops in order to give you money, you might become your own worst enemy. By reducing friction, you increase your chances of more sales, more happy customers, and more cash in the bank. Here are a few ideas for improving your receivables rate:
- Incentivize customers to pay outstanding receivables early, and reward customers who pay in full with discounts.
- Have all of your accounts at one bank.
- Set up electronic payment options through your bank like Automated Clearing House (ACH). Instead of checks taking 7 to 10 days to navigate the postal system and clear the bank, payments can arrive overnight…earning you a full week of stronger cash flow!
- Set up a managed lockbox service–a special P.O. Box to which customers mail their checks and that your bank monitors so that deposits post automatically the day they arrive.
3. Be quick to deal with late payments.
You should contact clients who owe you money on the first day that they are past due. You don’t need to be overly aggressive (unless they are belligerent and make it clear that they are refusing to pay).
Most people want to do the right thing. More than likely, a simple reminder is all they need. By acting quickly, though, you send the signal and set the standard that payments are expected on time…every time.
4. Realize that you can only expect what you inspect.
Children who are told to clean their rooms quickly learn that they don’t really have to if the parents never bother to check.
Likewise, in business, it’s only the things you measure and keep an eye on that will be done well. It’s true for the quality of your products and services, your employees, and your finances. When it comes to cash flow management, we recommend 4 metrics to keep you from running out of cash (Follow that link for a blog post we did on this exact topic last year.)
- Current and Quick Ratios
- Days Sales Outstanding (DSO) or Receivable Aging
- Debt-to-Equity Ratio
- Operating Cash Flow Ratio
The Bottom Line: Cash Flow is a Big Deal
Cash flow is the lifeblood of your business. Without it, your business will never make it. But when your cash flow position is strong and healthy, you’ll be set to grow and thrive.
Recently, we put together a free guide for our clients on “9 Simple Accounting Mistakes That Are Costing Your Business Money.” Not surprisingly, 4 of the 9 mistakes are related to cash flow management. Understanding and avoiding those basic errors can set you apart from your competition and put you in a much better cash position.
If you’re looking to go deeper on how to manage cash flow, check out this on-demand course from score.org, a nonprofit partner of the U.S. Small Business Administration.
And when you’re ready to partner with accounting professionals who understand business and how to manage cash flow in a way that helps you win, schedule a call with our team. It could be the most valuable thing you ever do.