From the moment they begin operations, business owners are advised to monitor cash flow closely. This is crucial because, even with strong sales, companies can face serious challenges if they don't have the liquidity to pay employees and cover expenses. Here are four strategies to help businesses control cash flow more effectively.
1.Stick with a Budget
While creating and maintaining a detailed annual budget can be tedious and sometimes contentious, it's crucial for effective cash flow management.
Your budget should be closely aligned with your strategic goals for the year. If you can’t clearly justify how an expense contributes to a specific goal, its value should be questioned. This will help you avoid unnecessary spending and keep resources available for important business needs.
Also, remember that a budget is only useful for analysis if it’s regularly updated to reflect actual spending. For example, you might have budgeted too much or too little for certain items, leading to higher or lower spending than expected.
2. Check your Statement of Cash Flow Regularly
Most companies should prepare financial statements, ideally in accordance with Generally Accepted Accounting Principles (GAAP). GAAP-compliant financial statements typically include three key components:
The income statement
The balance sheet
The statement of cash flows
When monitoring cash flow, the statement of cash flows is especially important.
This statement reports your business's net increase or decrease in cash by accounting for cash inflows and outflows from daily operations, asset purchases, sales proceeds, and financing activities. Since it excludes noncash accounting items, it helps you identify potential cash flow issues.
To maximize the benefits of your statement of cash flows, consider generating one monthly. However, quarterly or, at the very least, annual statements can also be valuable for spotting cash flow trends.
3. Exercise Expense Management
Maintaining accurate and up-to-date expense records is essential for effectively managing cash flow and working towards profitability. As you review your financial data, look for opportunities to reduce day-to-day operating expenses. For instance, you might save money by outsourcing functions like human resources, payroll and benefits management, or IT support.
If you manage inventory, it’s worth reconsidering your approach. The “just-in-time” strategy, for example, involves purchasing items or materials only when they’re needed. This can reduce carrying costs related to storage, insurance, interest payments, and other expenses. While this approach may not be suitable for every business, it could be a valuable option if logistical support in your market has improved in recent years.
4. Pay Attention to your Cash Flow Timing
Ultimately, cash flow management is about synchronizing the timing of incoming revenue with outgoing payments. To help stabilize these, consider the following strategies:
Conduct credit and reference checks on new customers to verify their payment histories and reduce the risk of collection issues. Additionally, keep customer account data up to date to prevent invoicing errors and costly collection delays.
Send invoices promptly, preferably using electronic billing methods. Implement consistent and methodical procedures for following up on past-due accounts—don’t wait until they’re 60 or 90 days overdue.
Keep an eye on your payables as well. In general, avoid paying invoices earlier than necessary unless you’re offered a discount. When possible, use your purchasing power for large-volume or frequent orders to negotiate discounts, free or low-cost financing, or extended payment terms.
Effective cash flow management is a challenge for many small to midsize businesses. However, there are strategies you can use to tip the odds in your favor. For expert assistance with this essential task, let us help. Schedule an appointment to review your financial statements and develop a customized, realistic strategy that best suits your business needs.