What Every Business Owner Needs to Know about Cash Flow
When it comes to your small business’s cash flow, the saying “timing is everything” couldn’t be more relevant.
For the business owner, the challenge is to avoid the cash flow gap that occurs when the business’s cash outflows outpace its cash inflows.
Fortunately, there are many strategies for improving cash flow management. Here are some of the best, brought to you by the Texas Society of CPAs.
FORECAST THE FUTURE
One of the best ways to manage your business’s cash flow is to prepare a projection that estimates your business income and expenses over a period of time. A cash flow projection doesn’t have to be complicated to be effective. You can use an accounting software program or even do your forecast by hand. If you’re not sure how to get started, a CPA can help.
GIVE CREDIT WHERE CREDIT IS EARNED
Good credit policies are essential to a successful business. Before granting credit, do your homework. Ask new clients for credit references and be sure to check them.
PUT THE INVOICE IN THE MAIL — PROMPTLY
Billing on a regular basis is one of the easiest ways to improve your business’s cash flow. Be sure that someone is assigned to send out invoices as soon as goods or services are delivered to the customer. When taking on large long-term projects, arrange to bill at regular intervals during the course of the work.
GET WHAT YOU'VE GOT COMING TO YOU
The faster you get paid, the better your cash flow position and the more cash available to run and grow your business. Strategies for hastening the payment process include offering discounts for early payment, adding a late fee to past due payments and aggressively following up on aging receivables.
TIGHTEN YOUR INVENTORY
Inventory can tie up a significant amount of cash. To see how your company’s inventory stacks up, benchmark your company’s levels against others in your industry. For optimum cash flow, don’t let suppliers’ discounts lure you into buying more than you need. Make it a regular practice to examine your inventory for excess or outdated stock and consider selling it at cost.
THE PRICE IS RIGHT — OR IS IT?
Periodically, check to determine that your prices have kept up with your costs and with what the competition is charging. Many small businesses avoid price increases for fear of losing customers, but those fears are often unfounded.
LEASE INSTEAD OF BUYING
In the long run, leasing generally costs more than buying, but leasing doesn’t tie up cash which can be used to run and grow your business. And since lease payments are deductible as a business expense, you still get the tax benefits even though you’re not purchasing the equipment.
PAY YOUR BILLS ON TIME, BUT NOT BEFORE
For maximum cash flow, it’s best to time your payments so they reach your suppliers when due and not before. The exception to this rule is when the vendor offers an early payment discount. If your cash flow allows, take advantage of the discount.
IF ALL ELSE FAILS
Don’t take it too hard if your business experiences a period of negative cash flow; most businesses do at one time or another. Contact your suppliers and vendors and explain the situation. If you have a good payment history, they may be willing to work out a payment arrangement.
Another solution is to have a revolving credit line in place before a cash flow gap surfaces. With a credit line, you can borrow money for a few days, weeks or months and pay it back when your cash flow position improves.
If you often find your business in a cash flow crunch, consult with a CPA. He or she can help you look for ways to build up your business’s cash reserves so you will be better prepared to weather the next cash flow shortfall.
(Updated and reviewed 2016)
Copyright 2006, The American Institute of Certified Public Accountants