A Simple Guide to Cash Flow Management for Small Business
John F. Dennehy Jr., CPA, PC

A Simple Guide to Cash Flow Management for Small Business

Proper cash flow management is essential to the success of your small business. If you want to have a thriving company, then you’ll need more money coming in than going out. You’ll also need to know where your money is.

While you might instinctively know those facts to be true, you may be getting hung up in the details of carrying them out. Nailing down the basics of cash flow management for small business will help you develop an effective strategy for success.

Importance of Cash Flow Management for Small Business

“Cash flow” refers to the money that moves in and out of your business. You take in cash with payments from clients or customers. You send out cash when you pay your vendors, the government, your employees and anyone else to whom you owe money.

To build a thriving business, you’ll need to be in control of your cash flow. For many small business owners, that’s easier said than done. A 2019 Intuit survey revealed that over 60% of small businesses struggle with cash flow.

Positive vs Negative Cash Flow

Positive cash flow means that you have plenty of money coming into your business. Your income is greater than your expenses. You may have extra funds available that you can invest back into the growth and development of your company.

Negative cash flow is the opposite. Your expenses are higher than your intake. You may have bills that you can’t pay, and you certainly won’t be able to invest any money in additional growth.

Tools for Making Money Decisions

Being aware of your cash flow situation is a key component in effective cash flow management.

Your best tool here is accurate accounting. If you want to know where your money is going, then you’ll need detailed records. Some small businesses try to handle the task on their own, but an accounting service is a better option. A professional accountant can set you up with a customized bookkeeping system that works for your unique needs.

Cash flow forecasting is another tool you can use. That means making predictions about your future cash flow situation. Financial professionals rely on their experience and analysis tools for developing informed forecasts.

7 Strategies for Improving Cash Flow

Getting smart about how you use your money can help you maintain a positive cash flow or remedy a negative one.

#1 Invoice Regularly

Sending invoices right away increases the chances of getting paid promptly. Waiting until the first of the month to send out your next round of invoices will restrict your cash flow.

If possible, mail out invoices as soon as you deliver goods or services. If that doesn’t fit your schedule, then at least make invoicing a weekly or twice-monthly practice.

Remember that digital invoices arrive more speedily than paper ones. Plus, today’s digital invoicing platforms often make it quick and easy to bill your repeat customers with just a few clicks.

#2 Encourage Timely Payments

Along with mailing invoices in a timely fashion, you can also encourage the recipients to send in their payments as soon as possible. Applying a late fee to slow payments is one way to go about this. Giving speedy customers a discount puts a positive spin on that idea.

As with mailing invoices, digital payments may arrive sooner than paper checks. Set up a portal for online payments that will be deposited directly into your bank account.

#3 Make Inventory Plans

If you buy too much inventory at once, you’ll tie up a lot of your cash. You may need to make smaller purchases throughout the year instead of placing one enormous order every six months.

Pay attention to what sells and what doesn’t. Consider giving discounts to move some of your less popular merchandise, and don’t order those items again. Instead, invest your inventory budget into items that do sell well.

#4 Trim Expenses

In addition to trying to bring in more money, you can also cut back on what goes out. Consider what goods or services you could do without.

You may be able to cut back by:

  • Canceling recurring subscriptions
  • Choosing lower-tier plans from vendors
  • Outsourcing tasks, such as accounting, to a third party instead of paying a full-time employee
  • Reducing staff
  • Trimming hours

Cuts that will cost you customers may not be worth it in the long run, though, so it’s smart to weigh each decision carefully.

#5) Negotiate Where Possible

You may be able to arrange payment plans or discounts with some of your vendors. Not all vendors will agree to this, but why not ask? The more flexibility you’re granted, the more freedom you’ll have to schedule your payments in a way that works for your cash flow needs.

#6) Secure Access to Loans

There may come a time when you'll need quick access to extra cash. It’s a good idea to know ahead of time where you can get that money. If you’ve already secured a line of credit, you’ll be ready when the time comes.

#7) Maintain an Emergency Fund

Build an emergency fund before you start reinvesting extra cash in your business. A general rule of thumb is that you should have enough cash on hand to cover 90 days’ worth of business expenses.

Personalized Cash Flow Management for Small Business

Managing your cash flow has to be a top priority if you want your business to succeed, but you may need some help to make it happen.

Turn to the team at John F Dennehy Jr., CPA for cash flow management assistance. Our experienced staff is ready to help with your accounting, bookkeeping and cash flow forecasting needs.

Contact our office today to set up your appointment for a free consultation.

About the Author John F. Dennehy Jr., CPA, PC

We at John F. Dennehy CPA are a team of certified public accountants who service clients throughout Long Island. The services that we provide are comprehensive, and we can resolve multiple accounting needs for a client.

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