Managing a positive cash flow for your business is a delicate science, bordering on art. It’s simple in theory. Cash flow is the net amount of cash (and cash equivalents; highly liquid short-term investment securities) that goes in and out of your business.
Positive cash flow is a strong indicator of your business’ health. If you consistently have a positive cash flow, your business is gaining more and more liquid assets. Positive cash flowb will help you pay off debts, loans, and cover operating costs, in addition to allowing you to reinvest those liquid assets and cash flow right back into your business.
Instead of just keeping your business in the green, a healthy positive cash flow will allow you to grow and expand, as well as plan for the future and save money in a rainy day/emergency fund for your business. Cash flow equals smooth sailing.
So what can you be doing to help improve your business’ cash flow? How can prospective entrepreneurs prep their new startup businesses before they open to maximize positive cash flow early on?
Here are the five best easy-to-implement cash flow tips to help your business get (and maintain) a positive cash flow:
Make a Realistic and Up-To-The-Week Plan
Just like with any goal, your first move should be to put pen to paper and plot out how you intend to achieve this goal of positive cash flow. Plot out realistic milestones to hit in the nearer future.
Try to map out what you anticipate your cash flow looking like for the next week. Revisit your predictions every other week and update it regularly enough to give yourself a constantly accurate look at what your cash flow might be like 6 months or even a year from now.
The financial controller for telephone conferencing provider Powwownow, Andrew Johnson, suggests this method of planning. “Setting targets for the credit controllers is an excellent way to ensure it is given the attention necessary and provides a level of satisfaction and ownership to hit and beat these.”
Invoice As Quickly As Possible
The fewer outstanding accounts receivable that you have to worry about, the more cash flow you’ll have in your business to reinvest and share appropriately. Do whatever you can to get your consumers to provide payment as soon as possible after receiving their products or services from you.
Here are a few easy things to remember when trying to get your clients to pay up in order to improve your cash flow:
If you invoice the recipient a week after they have the finished product in their hands, they have all the power (and the product). There’s no longer a strong incentive for them to pay you quickly.
But if you send them an invoice (a physical copy that you can hand them in addition to an instant email copy of the invoice) the minute that the work is completed, you’ll have a better chance of them paying their bill before they receive the product. You can even reserve delivery of the finished product until their tab is paid up, as long as you’ve provided them with the invoice and proof that the product is completed to their satisfaction.
Invoice more than once.
Invoice as quickly as possible, and they’ll be more likely to remember to pay you. Often times, consumers simply forget, and it’ll only get worse the longer you go without invoicing them. Send them multiple copies of the invoice if need be; one every week or two.
They might just need an extra reminder in the form of a phone call or additional email. But it’ll be a couple weeks before their money is actually processed and in your bank account; available for you to use as cash flow for your business. So get on the invoice ASAP so that you can access and better utilize those funds ASAP.
Make payment as easy as possible for your customers.
Online payments will be the easiest and quickest for both of you. The money will start processing within hours, and will show up in your bank account faster. Checks, whether mailed or handed directly to you, take time to process, could bounce, or cause other hang-ups that’ll slow down the actual event of your receiving payment. Of course, cash is always the best option.
Be sure that your payment and billing system is streamlined and running smoothly. If your customer is having trouble paying you through an outdated or unprofessional online bill system, it’ll only cause more frustration and wait time for both of you. The same goes for a faulty credit card processing system. Invest in upgrading your billing methods so that it’s easier and faster for the money to be processed and converted into usable cash flow for your business to start benefitting from.
Do whatever you can to turn those assets into actual cash flow.
Outstanding accounts receivable is always a good asset. But it’s not as good as real cash flow, which can only happen after the customer pays their bill.
Marion Thomson, of Embarc Ltd Accountants, cautions this: “If you wait two weeks after the work has been complete, then it should be fairly obvious that it will take a further two weeks before that cash arrives in your bank account. Issuing your invoice by email will mean it will get there immediately and you will have a record of it being sent.”
Work to minimize the time between invoicing and payment and cut down on those pesky debtor days that every business experiences. Andrew Johnson recommends making a habit of direct debit. “One excellent way to ensure these remain stable is to establish direct debit as a business norm for collecting receipts. It allows a business to scale without increasing the costs required to collect the debt, while also providing a stable inflow of cash from which all payments can be made from,” says Johnson.
Keep Better Tabs on Your Cash Flow with Technology
Even basic accounting software typically offers businesses a way to check their current and past cash flow records. Understanding where you’re at and any changes you may have implemented that helped or hurt your business’ cash flow will make it easier for you to assess what can be done in the future.
Keeping up-to-date with new technology that can improve the way you do business (and hopefully improve your cash flow) is necessary. So bite the bullet, ask around or check with an expert, and invest in some good software systems to help analyze and track cash flow for your business.
With cloud-based accounting services, you can check on your daily/weekly/monthly/quarterly cash flow and watch when money movements shift to better understand the cash flow needs of your individual business. Plus, it’ll save you from having to keep and store those records yourself. All the data is automatically backed up onto the cloud, and can be saved, sent, and shared wherever you need the information to go, instantly.
If you don’t already have some kind of accounting software installed, consider it sooner rather than later. Not only will it help you manage and track your business’ cash flow, but it’ll help you with most of the financial aspects of running a business. 24/7 accounting, account spreadsheets, employee information, and records of where money is being spent to help you budget.
Having a constantly updating, up-to-the-hour record of the analytics of your business is invaluable. And who’s really going to turn down an extra set of “eyes” on their accounting and taxes? With detailed online records of your business, you can better examine and dissect the cash flow data for your business and use it to your advantage.
It’s like having an accountant on hand all the time, who’s constantly (and literally) plugged into your business. Find and install a great software that has a good cash flow feature. Do a little research to find a system that meets your own specific set of needs, and invest in the technology. Revisit it every year to see if a more sophisticated version is on the market.
A note for the techno-phobic business owners of the world: if you truly don’t trust the inhuman touch of a software system with your cash flow analysis, consider training an employee to monitor cash flow for you. You may have already discovered that you can’t do everything yourself. Cash flow monitoring is no exception.
Your main priority as a business owner is hiring the right people to run your business while you oversee that the wheels are all turning as they should be. So delegate the task of monitoring cash flow to a trusted employee to check on the daily credits and debits to ensure that the cash is indeed flowing. This is particularly helpful if you run a business where income can be irregular.
Stay In Touch With Your Bank
Many banks will offer business who are just starting out a variety of helpful solutions. There are often options for services such as credit and overdrafts that you may not realize is available to you. So call up your bank and let them know the situation.
There are often programs at banks, or even on a local, state, or federal level to help you get started. There’s nothing to lose by asking what’s available, so call them up and ask for their advice. Everyone wants small businesses to succeed.
A newly-launched business called Hire or Buy Art, run by Andrew Selmes, makes an effort to stay in touch with their bank and keep them apprised of any changes. So if you see something that will change your original cash flow plans and forecasts (as discussed in Tip #1), call your bank immediately.
“If we see anything unexpected, we go away and let the bank know so there are no shocks. My partner is on first name terms with our banker and gives them the same respect as we would give to our clients. We speak to our contact at the bank every four to six weeks and we are incredibly frugal about what we spend our money on – our bank appreciates that,” says Selmes.
This has several benefits. The most important two being: it keeps you in good standing with your bank, and it offers you a chance to get some outside perspective from a financial institution that wants you to succeed. Keeping a good reputation of communication with your bank will increase your chances of them working harder to help you in the future.
That means they’ll be more likely to approve you for a business loan, should you ever need one; because they know you as a responsible, on-the-ball business owner who shows initiative and professionalism by keeping the bank informed as to any unexpected cash flow shifts. They’ll feel more comfortable entrusting you with a business loan because you’ve proven yourself trustworthy and easy to communicate with.
Better Manage Your Payables
It’s easy to get carried away with a sudden explosion of growth in your business. “My cash flow problems are saved!” you might think. But careful management of your expenditures is the only way to keep that cash flow healthy, no matter how great your sales are looking.
Be very careful where you put that newfound cash flow. Entrepreneur offers these tips for helping businesses manage their payables and keep the cash flow positive:
“Take full advantage of creditor payment terms. If a payment is due in 30 days, don’t pay it in 15 days.
Use electronic funds transfer to make payments on the last day they are due. You will remain current with suppliers while retaining use of your funds as long as possible.
Communicate with your suppliers so they know your financial situation. If you ever need to delay a payment, you’ll need their trust and understanding.
Carefully consider vendors’ offers of discounts for earlier payments. These can amount to expensive loans to your suppliers, or they may provide you with a change to reduce overall costs. The devil is in the details.
Don’t always focus on the lowest price when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow more than a bargain-basement price.”
Utilizing those tips has a common theme: don’t tie up your cash too early on. Leave it free to use as it’s most needed in the moment.
Achieving and maintaining balance and a positive cash flow can be tricky to get just right. So make sure that you’re using extra cash wisely in order to keep the cash flow flowing inwards, and being used to benefit your business.