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5 Tips to Keep Cash Flow Strong

by
Sherri Hastings
on
8/3/2016
5 Tips to Keep Cash Flow Strong

Business owners who have trouble with effectively managing their business's cash flow are almost guaranteed to fail. Every day, there are new entrepreneurs that attempt to start businesses. Every day, many business owners also lose their businesses. Some of these business owners, after spending much time developing their business plans, find themselves confused and unable to understand why their companies, products and services failed.

In many cases, the problem has a simple answer: cash flow. Cash flow is the lifeblood of any business and is essential to the success of the business. When money is tight and bank loans are difficult to come by, businesses that are cash-strapped can quickly be pushed to the edge.

The lesson that business owners have to learn quickly is that a business cannot function over the long term if the cash outflow is greater than the cash inflow. All businesses, especially startups, must closely monitor the business's cash flow in order to prevent a serious disruption of operations. In business, cash is king and cash flow should be the business's top priority.

The majority of cash flow issues are the result of entrepreneurs failing to accurately estimate the arrival of various streams of revenue in comparison to the need to pay off business expenses. Entrepreneurs have to realize that the main importance of estimating accurate cash-flow projections is to address day-to-day activities. For business owners that don't estimate their cash flow accurately for the upcoming period (quarter, month, day and week), they are placing their businesses at serious risk.

Starting on the first day, businesses should manage and track cash flow beginning with when they have to pay vendors, employees and others and at the time that they collect from their customers. Doing anything else will almost guarantee failure. These tips can help a business owner to ensure that his cash flow is managed correctly and not placing the business at risk of failing:

1. Create a budget

Entrepreneurs should start by carefully estimating the expected cash inflows and outflows for the business. Factors to consider include the sales cycle for the business, terms of service, and discounts that are offered to customers, industry delinquency rates and other factors that could affect the timing of incoming payments.

In a similar fashion, it is a good idea to estimate the expenses and other cash outlays. This includes the timing of the purchase of equipment, supplies and raw materials. It also includes the schedule for paying taxes, salaries and other important daily expenses.

2. Keep track of the results

The budget should not be examined infrequently. At least once per month (but more often, as required), the actual cash flow should be compared with the budget to work out kinks in the system. If case inflows are less than anticipated, determine the reason for the shortfall. If cash flows are higher than previously forecasted, understanding the cause is also important.

Once the reasons for the budget variances have been determined, the business can make the corrections that are required, either to the budget or the business plan or both.

3. Bill right away

A major element of cash-flow management is keeping a tight control over when funds come in and go out. It may be customary, depending on the industry, for a business to extend credit to purchasers. However, customers may given net 30 terms for payment. While the buyer is not required to offer a payment for 30 days, the company must continue to meet its obligations financially.

The easiest tactic for a business to pursue is to send a bill to a client right away. Businesses that make sales with credit must also send an invoice right away within one day after the transaction has taken place. Additionally, companies should keep track of the invoices and send out reminders prior to the payment due date. Businesses that delay sending invoices will likely end up receiving payments late due to the processing time that is often required by the purchaser. Businesses should upgrade to email invoice delivery in order to ensure that invoices are delivered promptly.

To remove some of the financial pressures that credit sales can create, a business should put measures in place to speed up with receipt of payments. One useful technique includes providing discounts to buyers that pay their invoices within 10 days. Buyers that have sufficient cash to make their payment will be willing to avoid paying later in exchange for a discount.

Every business owner has dreams of making a huge sale. However, businesses that make big sales on credit are often put into dire straights because they may have to purchase additional inventory. In these cases, business owners should consider having the buyer make a down payment against the purchase so as to relieve the burden on the company's cash flow.

4. Come up with a Plan B

Regardless of how much time and energy a business owner spends on setting up a budget, an unexpected event can quickly cause major problems for even the most expertly managed cash flow system. During these times, the business may have to look for another source of cash to keep the business running until things return to normal. Some contingent funding sources include lines of credit, personal assets and friends and family. Business owners should have a Plan B in place well before these funds are required.

For example, a business owner that plans to borrow funds to cover a cash shortfall should have the line of credit or loan available well before the cash is required. Allowing a disruption to occur to the cash flow before getting approved for a loan is asking for a problem because most banks will not lend money to businesses that are in distress.

Even if a bank were willing to provide a loan to the business, there are very few financial institutions that will underwrite and approve a request for a loan in less than one month. By that time, the business will have already failed as a result of being unable to cover its cash requirements.

5. Set up policies for timely payment

An effective cash flow management strategy means that you must have a strategy in place to rapidly collect invoices and timely payments. This means that businesses should never pay bills before they are due or when they are late. The company should pay its bills when they are due. This guarantees that the business's cash is working the way it should.

To the extent that the company has enough cash, managers should ask for a discount in cash at the time of making a purchase instead of using credit. The offer of a cash payment may convince the seller to offer a discount. This can be extremely beneficial in the instances of big-ticket purchases when a discount can mean substantial savings.

Working with an accounting professional can offer you systems and controls to manage your business during the tough times.

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Sherri Hastings

Sherri Hastings

Tim Murphy is the managing member at Murphy & Murphy, CPA, LLC, a full-service certified public accounting firm, with emphasis on tax preparation, audits of governmental, educational, and non-profit entities, retirement planning, estate planning, business valuations, litigation support, and banking. He is a Certified Public Accountant in Maryland and Virginia. Tim is also a CERTIFIED FINANCIAL PLANNER professional, Personal Financial Specialist, Accredited Estate Planner, Certified Valuation Analyst, and Investment Adviser Representative.

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