Five Strategies to Improve Cash Flow Management
For most businesses, few topics are as critical as managing cash flow, but with numerous pressing matters demanding attention, it is common for busy entrepreneurs to overlook warning signs of potential cash flow problems.
Here are five best practices to help you manage your cash flow:
1. Selecting the Right Clients
Revenue and cash flow aren’t the same thing, but it can be easy to focus only on growing your sales at the expense of your bottom line. Sales volume doesn’t necessarily reflect your true profitability or the health of your business. It’s important to look at your sales cycle from a holistic point of view.
You may be generating sales but, if you are spending too much money on labor, materials, or equipment to get the business or it is taking too long to collect, you are going to have poor cash flow. Better customer selection criteria can ensure that you are attracting and serving the right customers: profitable customers.
2. Invoice & Collect Quickly
The cash conversion cycle is longer than most business owners recognize. It begins when you start spending money (including labor costs) and it ends when you are paid, so a timely process for invoicing is key to cash flow management.
- How timely are invoices sent out?
- How fast and proactive is your collections process?
Slower invoicing means slower cash flow. Businesses need an effective process in place to send invoices immediately following a sale or the provision of service.
Good collection processes are also a crucial, and commonly overlooked factor in cash flow management. It’s easy for a manager or entrepreneur to get busy and let collection efforts slide. Address delays before they become problematic – especially if your accounts receivable aging is another 30, 60, 90 days or longer. Regularly review your aging accounts – when something is beyond established terms, act immediately.
3. Create a Cash Flow Plan with a Long View
It is beneficial to have a process in place to understand your cash needs in the short and long term. Cash flow projections give you the ability to think ahead as well as make decisions confidently in the here and now.
A strategic cash flow plan should establish key metrics that allow you to think through the best timing for adding assets or tackling large one-time expenses. A strategic cash flow plan should answer key questions like:
- Amount of working capital needed to effectively run the business
- Expected inflows from customer sales and collections
- Timing of purchase of goods, payment of labor, overhead, and other operational matters
- Amount and schedule of significant one-time large expenditures or fixed asset purchases
- Outflows for federal, state, and local income tax liabilities
For a growing business, this type of plan is critical for determining the amount of capital needed to fund growth. For a business suffering through a decline, cash flow projecting can be a tool to help turn things around. Cash flow projections help you ascertain what your growth looks like and projects the cost of funding that growth.
A good practice is to project cash flow for a 12-month period; however, a longer time frame of 24 months may be appropriate. The decisions you are facing may impact the period for which you project. Some of these things may be renting a new space, buying new equipment, or adding new staff. It can also help you identify and address potential cash flow problems.
4. Put Your Cash to Work
Some businesses accumulate a sizable cash balance. While the business needs to keep the right amount of cash on hand, it is not good cash flow management to sit on funds that could be earning interest. When you have more than enough cash on hand to meet your operating needs and liabilities, consider your options for putting your excess cash to work for you:
- Set up a money market or other interest-generating account
- Make a bulk inventory purchase that saves you money in the long run and provides better margins on goods sold
- Invest in a new business or product line
5. Don’t Wait to Get the Help You Need
You don’t have to be at a particular stage of business growth to implement a strategic cash flow process; it is a useful tool for businesses of every size.
You may also need to seek professional accounting help. The right accounting partner can save you time, money, and aggravation by quickly helping you get an accurate picture of where your cash flow practices are working and where they are falling short.
Understanding cash flow is a good foundation for making business decisions. During an economic downturn, healthy cash flow not only keeps you safe but affords you the freedom to pursue opportunities that would not be available without it.
Kirsch CPA Group specializes in taking a holistic and forward-thinking approach to your business and tailoring solutions to help you meet your goals faster and more cost-effectively. Speak with one of our cash flow management experts to start gaining the visibility, control, and foresight you need to grow your business.
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