It’s no secret that poor cash flow management is a business killer. According to various reports, 38% of start-ups and 82% of small businesses fail due to cash flow problems. What are these cash flow problems, and what does cash flow management even mean? Here’s everything you need to know about cash flow management, from what it is and why it’s so important to proven cash flow management strategies for a flourishing business:
What is cash flow management?
Cash flow refers to the circulation of money in a business. The inflow could be from sales, investments, and financing, while the outflow goes toward business expenditures such as payroll, bills, taxes, and supplies. Managing cash flow revolves around tracking cash streams using cash flow statements, predicting future revenue and expenses, and ensuring there’s enough money at any given time to keep the business afloat.
Cash flow management is all about keeping the cash meter's needle in the green or maintaining a positive cash flow. That means having more money coming in than going out of the business. It might sound simple enough, but managing cash flow is a common challenge among small business owners. So much so that some hire full-on accountants and financial managers to get a handle on cash flow. To give you some more perspective on this, here is a list of common cash flow issues:
- Running out of cash
- Late payments from customers
- Underestimating costs and expenses
- Overambitious income projections
- Growing too fast
- Sales challenges (pricing issues, market fluctuations, inventory mismanagement)
- Unexpected cash sinkholes such as natural disasters, lawsuits, and accidents
- Withheld or inaccessible funds
- Inconsistencies in bookkeeping
Any of these issues can lead to a cash burn that gradually or rapidly devastates a business. The goal of cash flow management is to alleviate such problems or at least anticipate them and come up with effective workarounds. That’s why sound cash flow management is so vital to business health, agility, and survival.
Proven cash flow management best practices
Every business has a unique cash flow structure based on its enterprise model, expenditure profile, and revenue streams. So, cash flow management is not one-size-fits-all. However, we’ve compiled this comprehensive list of general cash flow management practices and tips suitable for any small business or fresh start-up:
1. Minimize your outflow
Reducing costs is a fundamental cash flow management practice. It’s a great way to free up extra cash and improve the bottom line without earning more money. And it's not just a temporary fix for lean times either. Keeping business expenses and overhead as low as possible must always be a priority. There are many different ways a business could minimize cash outflow without compromising quality or customer service. Here are some of the areas where you can easily trim unnecessary spending:
- Review your expenses and cut off what the business can do without.
- Outsource labor instead of hiring full-time employees whenever possible.
- Lease essential business assets (vehicles, office space, tools, equipment, etc.) instead of buying. This spreads out hefty expenses so as not to strain the cash flow with lump sum withdrawals.
- Economize your operations with business process automation.
- Shop around or renegotiate deals with suppliers, insurers, creditors, and vendors.
- Cut your own pay.
- Try free or low-cost marketing campaigns rather than costly ads.
2. Upgrade from spreadsheets
It’s important to keep track of the numbers to see where your cash flow is headed. But remember, the days of bookkeeping on spreadsheets and paper are long gone. Modern financial transactions are way too fast and complex to capture and track manually. That’s where dedicated bookkeeping or accounting tools come in handy.
You can choose from hundreds of premium accounting systems such as QuickBooks, Xero, FreshBooks, and Wave. Some of these applications cost as little as $20/month, integrate seamlessly with the existing sales and payment systems, and give you an insightful view into the cash flow — so many reasons to ditch the spreadsheets.
3. Separate business and personal finances
Small and new business owners, especially sole proprietors, are easily tempted to mix business and personal finances. It’s all your money anyway, so what’s the point of keeping it in separate accounts and earmarking certain funds for certain purposes? This is known as commingling, and while it may seem sensible enough, it can lead to all sorts of financial risks and complications.
The first and biggest problem is that you can’t really tell how the business is doing based on financial records alone. Second, you risk losing your business status. The IRS may consider your business a hobby and disqualify it from tax rebates and deductions. Third, commingling exposes your personal assets to any legal action taken against the business.
4. Optimize your inventory
If your business deals in consumer goods, oversights in maintaining inventory can really mess up your cash flow. Inventory management is a delicate balancing act between having enough product or raw material in stock and tying up capital. It basically comes down to synchronizing sales, the supply chain, and stock to avoid holding too much of your working capital in inventory and starving the rest of the business.
5. Encourage customers to make early payments
Like static inventory, unpaid invoices can withhold a huge chunk of your working capital, severely disrupting the cash flow. The Net 30 Terms are the status quo of invoice payments. Research by Due shows that 63% of all invoices are paid within 30 days. But some customers still delay invoice payments, and some do not pay at all. Below are a few tactics you could try to encourage early payments:
- Do not sit on invoices; issue them as quickly as possible.
- Make the sale agreement and payment terms clear.
- Tighten the payment schedule (it doesn’t have to be 30 days).
- Ask for a sizable upfront deposit.
- Allow for multiple payment methods.
- Send the buyers frequent reminders to pay.
- Offer rewards to early payers.
- Penalize late payers.
- Review and track your invoices closely.
Remember, you can always liquidate unpaid invoices instantly through factoring or other invoice-based financing. This is a quick and convenient way to free up any cash tied in due invoices.
6. Design contingencies around financial risks
Does your business have a financial risk cushion? Part of financial planning is ensuring you have enough money set aside for a rainy day. Ask yourself what you'd do if your business were unexpectedly hit by a cash-draining natural disaster, cyberattack, lawsuit, or disruption, and you’ll appreciate the importance of a financial safety net.
A financial cushion replenishes dwindling cash flow and keeps the business going through crises. An ideal risk cushion should be worth at least six months of working capital. But it doesn’t have to be in cash; it could be a ready line of credit or highly liquid assets.
7. Borrow money whenever you need it
Never shy away from borrowing money whenever in need, no matter the size or state of your business. It’s quite normal for the cash flow to fluctuate, given how the business environment is sometimes unpredictable. The good thing about external funding is that it can quickly fill any cash flow gaps that grow too large.
Additionally, business financing can help preserve your cash flow and keep it in the green. For instance, instead of drawing large sums of money from the business to make a high-value purchase, you can simply finance the investment using a business loan and spread out the cost over several months. The point is, don’t put unnecessary pressure on your cash flow when financial assistance is within reach.
Easy financing with Lendzero
Admittedly, seeking business financing can be a daunting task. That’s probably why many entrepreneurs would rather risk their cash flow than go through the tedious financing application processes.
But we have some good news — Lendzero has simplified the borrowing process for you. Our online system automatically matches your business with the most suitable lenders and pre-qualifies it for various financing offers. We also negotiate with the lenders on your behalf to ensure you get only the best deals. Sign up with Lendzero and take your cash flow management to the next level with pain-free financing.
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