Cash flow is defined as the money that flows in and out of your business. Most businesses issue monthly statements to report on their cash flow.
If you have more money coming into your business than going out, you have a positive cash flow, also known as being “in the black.” On the other hand, if you have more money going out than coming in, you have a negative cash flow, also known as being “in the red.”
While cash flow is a pretty straightforward concept, managing cash flow can be very difficult. Yet, it’s a crucial aspect of your business. Read this guide to learn how to manage your cash flow effectively.
1. Invest in Accounting Software
Nowadays, there’s no reason to manage your cash flow by hand. Investing in a high-quality accounting software program is one of the best ways to improve your cash flow management, as it reduces the risk of human error.
Many of today’s accounting software programs come with intuitive interfaces, so you don’t need to be a professional accountant to use them effectively. Investing in accounting software helps you take the guesswork out of cash flow management and always you to more easily handle negative cash flow periods. Plus, these software programs allow you to create, send, and track invoices, making it easier for you to track what’s paid and what’s overdue.
There are dozens of accounting software programs to choose from, so we recommend doing some research before picking one for your small business. Some of the most popular accounting software programs include QuickBooks, Xero, FreshBooks, and Zoho.
However, we still recommend hiring an accountant to handle your taxes.
2. Send Invoices ASAP
The sooner you send out invoices, the faster your business gets paid. Cash flow distinguishes between the money you’ve sent and the money you’ve been paid. While you may have sent a $10,000 invoice to a client, it doesn’t mean much until the money is in your business’s bank account. Staying on top of your invoices will help you better understand exactly how much money is coming into your business.
While many businesses send out monthly invoices, we recommend avoiding this setup if possible. Instead, we recommend sending invoices to your clients every time you complete a specific amount of work. For example, if you run an advertising agency, you can send out invoices every time you complete a campaign, as opposed to at the end of the month.
3. Choose the Right Payroll Cycle
In addition to complying with wage and hour laws, you want to ensure your payroll cycle coincides with your revenue stream. If you run a restaurant or another business that generates daily revenue, then you’ll likely have the cash needed to generate weekly or bi-weekly paychecks.
However, if you run a manufacturing business or another business with a slower revenue stream, then you may want to consider issuing bi-weekly or even monthly paychecks. Again, make sure to check the local laws regarding pay periods before making any decisions.
4. Adjust Inventory if Needed
You should regularly check your inventory to identify products that aren’t selling well. Slow-selling products can hurt your cash flow, as the cash you’ve spent to obtain or make the products isn’t converting into profit.
We recommend selling the less-purchased items at a discount and not buying any additional stock after you’ve depleted your supply. On the other hand, make sure you’re stocked up on products that sell well. If you run a restaurant or some other business where your products may expire, ensure you adjust your inventory accordingly so nothing goes to waste.
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5. Borrow Money Before You Need It
It may seem counterintuitive to borrow money before you need it, but it’s often the best strategy. If you wait until you’re in trouble to borrow money, there’s a chance that your bank will reject your loan application.
Instead, open up a business line of credit when your numbers are good, as this can help you avoid the risk of rejection later on. In addition to borrowing early, we recommend borrowing more money than you think you’ll need. This will allow you to have a reserve to draw from when times get tough.
6. Spend Less on Business Expenses
Spending less money may seem like an obvious piece of advice. However, many business owners overlook this strategy. First, you need to understand exactly what you’re spending money on and how much you’re spending.
Having up-to-date information on your expenses will make it easy for you to accurately pinpoint where you’re spending unnecessarily and where you can make cuts.
7. Use a Business Credit Card
Using a business credit card to pay for everyday expenses allows you to free up cash. We recommend keeping track of your daily expenses via online banking and consistently checking your monthly statements.
You should also take advantage of any reward programs that can help reduce your business expenses. For example, some business credit cards allow you to earn cash back on certain purchases.
8. Pay Bills Strategically
While you want to ensure you pay all of your bills on time, paying your business bills all at the same time usually isn’t the best strategy. Paying all of your bills at once can drain your cash and even jeopardize your relationships with your suppliers.
Instead, review your bills and sort them according to priority. Then, stagger your payments so you take care of the important bills first.
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Time to Better Manage Your Cash Flow
As you can see, there are many steps you can take to better manage cash flow. In addition to cash flow, taxes are another very important financial aspect of your business.
Check out this guide to discover the top tax tips for small businesses.