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Seven Best Practices for Managing Your Business Cash Flow

Seven Best Practices for Managing Your Business Cash Flow

No matter what type of business you operate, cash flow is what keeps things going. It makes absolutely no difference if your books show that you've made a profit based on sales that have been placed if you haven't received payment for goods or services provided - in fact, if the money isn't coming in, then no matter how strong your sales, you can still end up unable to pay your own bills, and even being forced into bankruptcy.

The only way to prevent this from happening to you is to pay close attention to how you are managing your cash, and where you find yourself failing, to make positive change.

Not having the cash in hand that you need will prevent you from being able to reinvest in your business. It may even force you to take out a loan in order to provide compensation to your employees and pay your own bills. In order to avoid these problems and put your business' cash flow into a healthy position, here are seven basic cash flow management steps you need to take:

  1. Make Accounts Receivables a Top Priority: Put somebody trustworthy and responsible in charge of keeping track of the payments you've received, and authorize them to make calls to follow up when payments are late. You want to make sure that the majority of your clients submit payments on a net-30 basis and minimize the number of those permitted to go beyond.
  2. Figure Out Your Breakeven Point for Profitability: Understanding exactly what point represents your business becoming profitable will help you determine what your cash flow needs are and give you something to shoot for. The worst possible situation for a business is when they are both not making a profit and don't have the cash they need to pay their bills. You need to pay attention to cash flow while keeping your breakeven point in the back of your mind so that you'll understand when you've reached the point where you should be able to begin having enough cash on hand to be able to pay bills easily.
  3. Stop Focusing on Profit and Start Focusing on Cash Flow: Every business owner thinks that turning a profit is the most important thing, but that is not always the case. You need to know your breakeven point, but you also need to do everything in your power to get your payments coming in faster, even before you reach it.
  4. Offer Incentives for Faster Customer Payments: If you don't give your clients a reason to pay their bills fast, they aren't likely to do so. If you're facing cash flow problems, it makes sense to both limit the amount of time that people can take to pay and to offer discounts for paying early. It's also a good idea to establish rules for credit eligibility. When you have those standards clearly established, you won't have to worry about extending it to people who are not deserving.
  5. In addition to having an employee in charge of watching accounts receivables, dedicate one person to monitoring your cash flow and letting you know when you have reached a comfort or discomfort point.
  6. Keep Some Cash in Reserve: If you know that your business' cash flow has a tendency to run a bit tight, it is important that you have money in your bank account. Having extra cash on hand may be the think that helps you to navigate paying your bills when payments haven't come in.
  7. Negotiate Attractive Payment Terms: At the same time that you want to keep your accounts receivables coming in quickly, you want to extend the time that you have to pay your bills for as long as you can. If you establish a reputation for consistently making payments, even if it is on an extended schedule, your creditors will likely allow you to continue paying in this way and it will alleviate some of your cash flow stress. Just make sure you don't get stuck paying late fees.

 Poor cash flow management puts your business at serious risk. Make sure that you're paying careful attention and react in time to keep yourself out of trouble.

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Jeff Donohoe, CPA

Jeff Donohoe, CPA

Jeffrey D. Donohoe CPA is a CPA based in Cleveland, OH. His firm J. Donohoe & Associates LLC has been providing quality, personalized financial guidance to local individuals and businesses. Their specialty is state and local tax (SALT) services and they work with other CPA firms throughout the country consulting on SALT issues. Donohoe & Associates provide tax preparation and accounting services, as well as audits, financial statement, and financial planning.

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