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Updated: Oct 16, 2018
Keeping your business afloat comes down to good cash flow management. Cash flow refers to the cycle of funds coming in and out of your business.
Positive cash flow is when your business has more money coming in from sales and accounts receivable than going out through accounts payable, payroll, and other expenses.
Negative cash flow is when the amount of money leaving your business is greater than your business’ incoming cash.
“Being able to manage how and when the cash flows through your accounts is a skill that takes practice,” said Sheila Hansen, a CPA for small business owners. Without careful cash flow management, she explained, your business may struggle. In fact, a study by U.S. Bank found that 82 percent of small businesses fail because of cash flow mismanagement.
The good news is it’s possible to improve your business’ cash flow. The first step is discovering what’s wrong.
The most obvious indication of poor cash flow management is not having enough money for regular payments, said Hansen. Other signs, she explained, include the following: uncollected balances from customers, high credit card interest as a result of repeatedly failing to pay the balance off on time, increasing loan balances, or overdraft fees.
If you find yourself dealing with any of these issues, it’s time to crack down on your cash flow management. Here are seven steps to take.
Good cash flow management and good organization go hand in hand, Hansen said. It’s crucial to use accounting software that tracks sales, accounts payable, accounts receivable, monthly expenses, and employee salaries. “Reconciling your bank and other balance sheet accounts,” said Hansen, “as well as reviewing the accounts receivable and accounts payable aging schedules on a regular basis can help you identify potential issues.”
Tools like Pulse and QuickBooks produce a cash flow statement that lets you know exactly how much you have coming in and out. SCORE also offers free finance templates and business planning advice. Through SCORE’s network of over 10,000 volunteer business experts, you can easily find a mentor to consult with in-person or online.
If you’re not sure where some of your business’ money is going, you may have money leaks. Go through your financial records carefully to pinpoint the areas where the money you’re spending isn’t benefiting your bottom line.
You may be pouring money into advertising that very few customers see, for example, or you could be paying for monthly services or subscriptions your business doesn’t even use, like a landline or file hosting account.
Fixing these money leaks — either by cancelling recurring payments or nixing ineffective business strategies — means more cash in the bank.
If the pay cycles for your customers and vendors don’t sync up, you may be setting your business up for negative cash flow. The solution, Hansen said, is to collect the money from your customers before you need to pay your vendors.
You can do this by creating new payment terms for your customers or clients, she advised. If you typically give customers a 30-day window to deliver payment, for example, consider cutting it to 14 days. Just make sure you give your customers ample notice of the change.
The first step toward improving account receivables is to speed up your invoicing process. Waiting to send invoices means you’ll have to wait longer to receive payments.
Next, implement simpler, more convenient ways for your customers or clients to pay you. If the majority of your clients prefer to send paper checks, instruct them to mail their checks directly to a lockbox set up by your bank, so the money gets processed faster. Or, consider setting up an online payment system like Bill.com or Invoicely to make it easy for clients to pay you on their mobile devices in just a couple clicks.
Hansen also said it’s smart to develop a “collection strategy for outstanding invoices or unpaid customer balances, including holding off additional sales to that customer until their prior balance is paid.”
Improving your cash flow may require revisiting your business model. It’s a good idea to periodically examine your pricing structure, Hansen said, to “make sure the sales price covers not only direct expenses, but overhead expenses.” Those can include anything from accounting fees and advertising costs to insurance or supplies.
Make sure you research how much your competitors are charging as well. If your prices are significantly lower in comparison, that may be an indicator you need to make some changes.
If your current loan payments are negatively affecting your cash flow, you may want to consider refinancing your loan. The process can be time-consuming, but it also has the potential to help your bottom line. You could save money on interest, for instance, if you get a small business loan that has lower rates. You may also be able to secure a longer-term loan with lower monthly payments, which means you’ll have more available cash to grow your business.
Keep in mind, though, that you may need a solid personal credit score if you want the lowest rates, and this strategy is only a temporary solution to a shortage of cash. You still need to have enough funds to make your loan payments and avoid going into debt.
To ensure you maintain good cash flow, create a comprehensive spending plan for your business, Hansen said. List all your expenses, including monthly bills, inventory, equipment, payables, loan payments, and payroll, as well as how much money you need coming in on a weekly and monthly basis to make your payments in full and on time.
Getting a better understanding of the numbers can help you set weekly, monthly, and quarterly sales goals. Then, “if you are not hitting those goals,” Hansen said, you’ll know “that you need to reduce your spending before you run out of funds.”
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.