Although every business owner understands the importance of healthy cash flow, many struggle to maintain it. Without access to liquid assets, it can be impossible for the business to grow. After all, owners need money to purchase additional equipment and inventory, hire more employees, establish an emergency fund, invest more resources in research and development, and afford several other common business growth expenses. When the cash flow reduces to a trickle or a business finds itself in debt instead, the steps below can help to improve liquidity and secure the company’s future.
Late-Paying Customers Pose a Significant Problem
A business operated by a solo owner and those with up to 10 employees struggle to keep positive cash flow and find access to affordable financing much more than larger companies do. It takes persistence and creativity to ensure that liquid assets remain consistently available.
One of the greatest challenges these micro-businesses face is receiving late payments from their customers. This is especially common in the B2B world where one-quarter of small businesses receive payments late more often than they receive them on time. Your accountant may have sent an invoice, but it could be 90 days or even longer before you collect on it.
Keep a Close Eye on Your Cash Flow Statement
A cash flow statement is a printed record of all income that your company receives every month. This includes such things as customer payments, interest, proceeds from sold merchandise, and proceeds from loans. The cash flow statement also includes your company’s outflows, including payroll expenses, rent, cost to purchase inventory, and cost of supplies.
We recommend using a software program such as QuickBooks to record the income and expenses for your business. This makes it easy to run a cash flow statement once a month to evaluate what’s going out against what is coming in. You can even run the report weekly if you feel that finances are especially tight.
Create Frequent Cash Flow Projections
You can have a good idea of the cash you can expect to have available over the next several months by frequently creating a master cash flow projection. This requires you to look at three to six months’ worth of cash flow statements to determine patterns and create estimates based upon them. Businesses with large seasonal fluctuations may want to review up to 12 months’ worth of cash flow statements to create the most accurate projection possible.
Compare Statements to Projections at the End of Each Month
Your projections will become more accurate over time if you take the step of comparing the actual income and expenses of your monthly cash flow statement against the projection for that month. This allows you to make more adjustments in future months as well as put tighter controls on spending if necessary.
Need more tips for managing cash flow? Business Partner Alliance is always here for you. We provide targeted coaching, consulting and business advisory services to help small and medium sized business owners achieve new heights. We put our passion and experience to work to help business people achieve their goals. Let’s meet for coffee to see how we can work together.
Emory Ware