Proper cash flow management is one of the most essential elements to running a successful business. Basically, you cannot pay bills if you do not take in money from customers and clients. Of course, controlling cash is difficult because some key factors in the inflow and outflow equation are actually out of your control. But there are ways to minimize shortfalls and keep a business in solid financial shape, and it all starts with understanding effective cash flow management.
Focus on profits, not cash. Much of small business accounting focuses on profits and sales, but what appears on paper is not the same as what’s available, on hand or in the bank, to use right now. Cash flow hinges on the (unpredictable) timing of when receivables are paid, when bills are due and paid, and when sales are booming or slow.
Encourage prompt payments. Small companies are often at the mercy of big clients that ignore invoice due dates. One strategy is to shift payment terms toward a larger up-front deposit, to cover the outlay of materials, supplies, production, or labor, and a smaller balance due. Another approach is to adopt policies that reward customers for on-time payment and penalize lateness.
Take advantage of extended payables. On the other hand, if your own suppliers and service providers offer longer, penalty-free payment cycles, take advantage. Set up electronic fund transfers that send money as close to when it’s due as possible. Make payments according to the schedule that works best for your cash-flow system.
Maintain reserves. Even the most careful, calculated cash-flow management systems cannot account for the occasional unpredictable shortfall. A safety reservoir of cash can help a business weather those rough patches smoothly to get back up and running.
Balancing the intake and outlay of cash is not a straightforward task for any businessperson. Accounting professionals can provide expert guidance in establishing payment terms, cash-flow worksheets, and billing systems to keep your company’s finances in top operating condition.