Cash flow is king. It is the lifeblood of any business. Often referred to as “working capital,” cash flow is the movement of money going in and out of your business and provides a lens into the health of your operations. If a business is going to survive, owners need to understand best practices to improve cash flow in order to ensure stability.
While cash is always a good thing to have on hand, it doesn’t necessarily reflect the actual performance of a business. For example, if a business has a large amount of cash tied up in inventory that isn’t selling, it may not be able to support the ongoing expenses of vendors, utility bills, staffing costs, and other financial obligations.
Similarly, a business owner may see profitability on their financial statements, but there’s a big difference between profits and cash. For example, haphazard spending may lead to more money going out than coming in, which will lead to a negative cash flow situation, putting the business in a crunch for cash even though it’s profiting from sales.
It’s important to understand the long-term considerations for effectively managing cash flow. The key strategies are: encourage incoming payments as fast as possible, delay money you owe as late as possible, and earn as much as you can on cash balances.
Here’s the top 10 ways to optimize your cash flow:
- Send invoices right away. Even though it’s tempting to put it off, sending invoices immediately after a job is complete or a project milestone is met will increase your positive cash flow.
- Set up electronic payment solution. There are a number of online payment solutions for small business to make transactions more seamless. Set up an online billing program to encourage payments more quickly and easily.
- Establish terms. Most payments or receipts for sales are finalized sometime after the project or sale actually takes place, unless of course, you’re running a retail business. Establish—in writing—clear terms or timelines as to when you will get paid.
- Include a “due by” date. Many times, invoices will state, “due upon receipt,” but those terms are vague. Try incorporating a clear payment due date, such as “Net 30,” which means payment is due 30 days from the invoice date. This payment term is very common for small businesses and freelancers.
- Enforce late fees. Even if it’s a small amount, including late fees on late payments incentivizing customers to pay on time so you can best manage your cash flow. You may even consider selling your invoices to an outside company for a nominal fee to expedite payment on a customer that is over 60-90 days late.
- Reward early payments. On the flip side, offering incentives to customers who pay early can accelerate payments and better position your business’ operations.
- Reduce inventory holding costs. Keep inventory costs low by forecasting and managing inventory efficiently. You may consider using a dedicated inventory management system to help with projections. Effectively managing inventory will reduce your change of negative cash flow issues as discussed above.
- Delay paying bills. If you can hold off on paying bills within reasonable terms and without penalty, hold off on paying your bills until they’re due.
- Look into cash sweeping. Some banking laws may restrict paying interest on business accounts, but others may offer a “sweep” arrangement, which is designed to move cash from a company account into an interest-bearing account after reaching a certain threshold.
- Analyze cash flow often. Are your actual numbers on track with your projections? What is your liquidity ratio, specifically accounts receivable to accounts payable turnover? Be sure to keep track of your cash flow each week.
Don’t forget, cash flow is king. Contact me at stu@erocktax.com or call the office line at (781) 247-5569 to put together a cash flow analysis, and we’ll check on the health of your business.
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About Stu: With more than 30 years of experience as a tax professional, Stu Steinberg brings a broad depth of knowledge to his work with his clients. Stu founded Erock Tax to help provide tax and financial planning strategies to individuals, families and small businesses and is passionate about empowering his clients through education about their money health. Stu is highly energetic and brings a sense of optimism, creative problem-solving and a deep level of commitment to every Erock client.