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Cash flow issues are often a significant risk for new businesses. It’s not due to a lack of understanding your product or service, or your customers’ needs, it’s more a symptom of not keeping a close eye on the money flowing in and out of your business on a regular basis. Without diligence and oversight of your cash flow, your business could lose its ability to grow, buy inventory, retain employees, or pay for its monthly expenses.
Read on to learn about 8 tips for better cash flow management and why understanding each is important to your business’s success.
1. Understand Your Business’s Cash Position
We’ve all heard the expression, “Cash is King”. There is no truer statement for a business of any size. As a business owner, you are passionate about the product or service you sell—you know it inside and out. You may also have a thorough understanding of your customer. What you may be missing is a well-developed skillset for managing your business’s cash position or the amount of cash that your company has on hand.
Being aware of your business’s cash position at every moment is crucial. Many owners and managers assume that simply increasing their sales will also increase their cash flow.
Sales does not always equal cash flow. If sales go up, you can expect expenses including cost of goods sold, employee headcount and payroll to also increase to meet demand. So, increasing sales may be great, but understanding cash flow is even better.
2. Predict Cash Inflows and Outflows with a Cash Flow Forecast
Accurately predicting future cash inflows and outflows is essential for effective cash flow management. A cash flow forecast should include projections of all incoming and outgoing cash, including accounts receivable, accounts payable, inventory and capital expenditures. It’s a smart practice to do both a weekly forecast and a quarterly one in progress at all times.
Business owners benefit from conducting a cash flow forecast by gaining an immediate understanding of their expected cash flow and how it relates to business decisions based on this information. A business owner can also view and analyze trends affecting the liquidity of their business. This allows you to make informed decisions for your business without simply reacting to the moment.
Predicting cash flow allows you to comfortably and with a fair degree of certainty invest in your company’s growth or adjust your spending.
3. Find the Balance Between Sales and Expenses
Expenses play a major role in properly forecasting cash flow. Oftentimes, business owners face disproportionate expense to sales ratios. This not only causes a stressful situation, but it also has a huge impact on cash flow.
Naturally, a business has expenses and bills to pay. That’s entirely normal. It is important that you closely monitor expenses and evaluate your spending. Are you exceeding regular monthly bills and spending more money than you currently have on hand? If so, you might need to explore options for working capital such as a business line of credit. We encourage you to talk to a Business Lender to discuss your working capital needs and the products that we offer to make an informed decision on how best to support the growth of your business.
4. Get Paid
It may sound obvious, but a business needs to be paid for its product or service. Without payment, a business cannot survive, however what is the best way for your business to get paid?
One strategy for managing cash flow is ensuring you have a method of payment that works well for both your business and for your customers. If your business relies on invoicing with payment terms, it’s important to make it easy for your customers to pay you. Make sure your invoices have all the necessary information their Accounts Payable department will need to make a timely payment. This includes invoice number, date, terms, amounts, specific tasks or product(s) sold, proper mailing address and even your Employer Identification Number (EIN) if necessary.
For more timely receipt of payments consider offering electronic payment options such as ACH. Speak to our Cash Management Specialists to discuss options available with a BankProv account.
Maintaining your cash flow is dependent on having a practice in place to bring in funds in a timely fashion.
5. Credit: Proceed with Caution
Credit is extremely important to a business’s growth and sustainability strategy but use it wisely. Too often, a business will take on a new loan or line of credit without the ability to pay it back via the profits of the business. This can be a very slippery slope for many business owners and can cause more debt and issues as the business progresses. Understanding cash flow helps you and your Business Lender better service your business’s growth and sustainability needs.
6. Make Sure To Have a Cash Flow Cushion
A cash flow cushion may also be called a liquidity cushion. For most businesses, it’s keeping enough cash or liquid assets on hand to meet unforeseen demands for cash. As the term implies, it’s a cushion that provides comfort and peace of mind should an unexpected expense occur.
Most experts recommend having a savings cushion of three to six months of your regular expenses. Talk to our Deposit Specialists to discuss the best deposit account options to keep these funds easily accessible to you.
7. Create Sales Projections for Multiple Scenarios
In business, it’s often hard to precisely predict sales. Sometimes when one door opens, another one can close. Additionally, your sales cycle could depend on your customer’s sales cycle, further complicating the sales process. One way to manage and understand your business cash flow is to understand all the possible scenarios that could affect sales.
Experts suggest making multiple sales projections for a variety of scenarios. Then, as you move along, revisit those scenarios, and adjust accordingly.
These can be helpful to look at historically and seasonally. You can reflect on the previous season or year and see your projections vs. actual sales. This should help guide you as you make new future sales projections.
8. Identify Cash Flow Issues
All businesses have to handle cash flow issues in one way or another. It’s important to fully understand your cash flow and identify any potential issues. In most cases, once you have a full understanding of your cash position and potential cash flow issues, they are completely correctable. At BankProv, we have a variety of cash management services available to help support your business.
Make Your Business Financially Successful
Learning the ins and outs of managing cash flow is a critical component of running a successful business.
Another important part of your business's financial success is having a trusted partner and advisor who will work with you and support your business goals. If you need a commercial bank that provides tailored financial solutions, we are here for you.
Contact us today to learn more about how BankProv can help your business succeed.