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Cash flow management for small business



Of all the reasons as to why businesses fail, insufficient cash flow is one of the most common. Often this is not due to the lack of actual business or the amount of sales being made but the non-management of the funds available. Every business has its differences, but the core principles are the same, cash is the lifeblood of your business, without proper cash flow management and planning your business will suffer.

Difference between profit and cash

It is important to understand that profit and cash flow are two different things. Many operators will tell you that it is possible for a business to generate strong profits but collapse because they have run out of cash. Profit is the result of trade over a given period, while cash flow is required to keep the business in operation by covering day to day expenses. This is why it is important to manage and understand how cash flows through your business.

What is a cash flow budget?

A cash flow budget simply records the amount of money that you expect to flow in and out of your business over a given time frame.  It is a financial tool that will help predict the availability of cash in a business at any given time. Receipts of cash and expenditures are calculated monthly to help plan for any future short falls in cash.

Setting up for Proper Cash Flow Management

As a small business owner, you must keep a record of all payments, bank statements, and bills from all customer sales and vendor and supplier purchases, items received, and cheques disbursed-including payroll.  Start your cash flow projection by adding cash on hand at the beginning of the period with other cash to be received from various sources. Then you must account for upcoming cash outlays like rent, inventory, salaries, benefits, taxes, office supplies, advertising, etc.

Better Manage Your Small Business Cash Flow

There are two key areas to analyze for better management of cash flow: receivables and payables.

# 1 Improving Receivables

If you got paid the instant you made a sale or provided a service, you would never have a cash flow problem. Unfortunately, this rarely happens, but you can still improve your cash flow by better managing your receivables on a daily basis.

Because cash is such a vital asset to your business, you need to do everything possible to make sure your customers pay on time:

  • Issue invoices promptly and follow up immediately if payments are slow in materializing
  • Offer discounts to customers who pay their bills quickly
  • Offer several different ways for your customers to pay you
  •  Track accounts receivable to identify and avoid slow-paying customers
#2 Managing Payables

Expenses must be carefully watched when you are managing a growing company as strong sales growth can conceal underlying problems. If your expenses are growing faster than sales, or even if they are not, examine your payables carefully and look for ways to better control them:

  • Make payments on the last day they are due to retain use of your funds as long as possible
  •  Keep an eye on your sales and expenditure patterns, and selling and billing cycles
  •  Maintain good knowledge of your suppliers and understand who offers the best terms and pricing
  • Manage and track your inventory so you don’t purchase more or less than you need

Ways to Take Control of Your Cash Flow Management

You will find it much easier to use an accounting software solution like Quickbooks or Sage Simply Accounting for managing all your financial records and your cash flow on a daily basis.

Remember, a company can close down because of cash shortage, even if the business is profitable. So look to accounting software to help improve your cash flow in the following ways:

  • Quickly issue professional invoices with detailed and accurate information
  • Reduce delinquent payments by offering more ways to electronically send and receive money
  •  Accept credit card payments online for easy, on-time payment
  • Access cash projection and customer aged summary reports to understand what monies are owed to you and what your cash position looks like at any one time
  • Easily track inventory to reduce waste and keep tabs on your inventory levels
  • Establish a preferred suppliers list that identifies previous pricing for materials or goods purchased
  • Forecast sales so you can plan ahead and be aware of customer buying patterns
  • Pull information directly from most banks and quickly cross-reference every transaction

Send and Receive Payments Electronically

Offering electronic payments is fast, accurate, and allows your business to experience fewer delinquent payments.

Accept Credit Card Payments

Accepting credit cards and debit cards is a popular way for small businesses to receive payments from customers and allows you to easily increase your business cash flow.

Accurately Measure Cash Flow and Determine What is Owed to Your Business

An accurate cash flow projection can alert you to trouble well before it strikes. Use your accounting software to prepare a cash flow projection-a report summarizing the bills that will be coming due in the future as well as money you should be receiving from customers and other sources-to show how your cash account balance will be affected from a specified date for a specified period of time. You’ll quickly be able to view your current account balance, the balance at the end of the period, and the lowest and highest account balance during the period. Using an accounting software also allows you to track accounts receivable to identify and avoid slow-paying customers.  Use the Customer Aged Summary report to display the total, current, and aged amounts that selected customers still owe you.

Improve Inventory Management

Holding more, or less, inventory than you need costs your business money, so plan ahead and be aware of customer buying patterns. You can improve your cash flow, reduce waste and generate profitability reports with inventory management capabilities of the various accounting software available. A well-organized list of inventory and service items makes it easy to keep track of the items you are purchasing and selling.

Better Manage Suppliers and Vendors

You could get a better deal if you shop around and negotiate longer credit terms and volume discounts with your suppliers. This gives you more breathing room and spare cash to reinvest in your business.

Forecast Sales for Increased Business Visibility

Gain a better understanding of your customers, projects and overall business with in-depth sales analysis and forecasting options. Forecasting sales allows you make predictions about future revenue and cash flow, and to review “what if” scenarios to help you make better business decisions.

Perform Bank Reconciliations Regularly

Reconciling your bank account is a critical accounting task that your business should carry out as frequently as weekly if you have heavy volumes of transactions, or once each month if you experience lower volumes.  Doing so not only helps ensure the integrity of your financial reports but allows you to accurately reflect your cash position on a regular basis.

As outlined at the outset, cash flow is the life blood of all businesses, and it becomes even more important when going through an economic downturn. Cash flow has to be managed. Cash management is as much an integral part of the business cycle as any other part of the process. The effect of cash is real, immediate and, if mismanaged or not managed, it is very unforgiving.

For more help with managing your small business’s cash flow, please contact one of our Partners at White Kennedy LLP to schedule a meeting.

Hopefully, this article has helped to provide you with insight into the basics of cash and credit management.

Remember, sound cash management will give your business just as much of an edge in your transactions as, say, an improvement in your manufacturing process or service delivery. Control and prosper.

For more help with managing your small business’s cashflow, please contact one of our Partners to schedule a meeting.

The information contained in this article is general in nature  is not taxpayer specific.  Before relying on any information in this article, please consult a professional to ensure the information you are relying upon is revelent in your particular situation. Tax law is subject to continual change, at times on a retroactive basis. Should the law or its interpretation change, our advice may be inappropriate. We are not responsible for updating our advice for changes in law or interpretation after the date hereof.