Maintaining positive cash flow can be tricky when you run a small business. Expenses can quickly outpace income, leaving you scrambling to pay your bills and threatening the future of the company.
Understanding cash flow prepares you to face financial challenges and guide you in establishing practical cash management strategies.
Why Cash Flow is Important for Your Business
Having too many expenses and not enough cash is a common problem for small business owners.
Although it’s not unusual to have a month or two during the year when you spend more than you take in, failing to maintain overall positive cash flow inevitably leads to failure. This is the fate of 82% of all small businesses, largely because business owners don’t properly supervise cash flow.
Part of the problem lies in the confusion between cash flow and profitability. It’s easy to make the mistake of thinking that being profitable means you have no small business cash flow problems.
So, How Does It Work?
However, a lot of businesses use the accrual accounting method. This method records income and expenses at the time of sale and billing, rather than waiting until money exchanges hands. Accrual accounting may make it easier to see how payables and receivables are related and monitor profits. However, it can also give you a false sense of security.
If you make a ton of sales today and offer net 30 invoice terms, the income won’t be available as cash to put back into your business for another month. This timeline also assumes the best case scenario, that customers are paying you on time. Your books may say you made money, but you could still wind up overdrawing your bank account if you have to cover expenses before payments arrive.
Looking at cash flow shows you how much actual cash you have at any given time.
Being cash flow positive – bringing in more than you pay out – increases your company’s liquidity, meaning you’re better prepared to cover all known expenses and handle unexpected costs. Businesses with consistently positive cash flow have a buffer to cover inventory, employee salaries and bills during the occasional slow period, and have a lower risk of failure when facing emergencies.
Tracking Cash Flow: Your Key to Success
How do you get a handle on what’s happening with your company’s cash?
Cash flow statements pin down inflows and outflows to show exactly how much you have on hand during a particular period. Assessing cash flow with these statements on a monthly basis alerts you to potential problems before they threaten to tank your business.
To prepare a cash flow statement, you need to look at three categories:
- Operational, which shows income and expenses related to regular business operations
- Investments, showing gains and losses from all areas in which you invest, including equipment and property
- Financing, representing money paid out as dividends and debt payments, or brought in by efforts to raise capital
Noting the increase or decrease in cash between your current and most recent cash flow statements shows whether you’re maintaining positive cash flow or operating without sufficient funds.
How to Use Your Cash Flow to Plan Your Future
These monthly snapshots provide essential information. But optimal small business cash flow management depends on more than knowing what’s going on with your cash right now. You also need to make projections for the future, so that you’re not blindsided by a slow period or a month where bills are due before receivables come in.
To be as accurate as possible, make projections based on previous cash flow statements and other financial reports. Start with the money on hand at the beginning of the month; add all money that will come in from sales, receivables and other sources; and calculate the total. Do the same for expenses, being sure to include a buffer for unexpected outflows. Subtract expenses from income to determine if you’ll be cash flow positive or negative, and repeat the process until you have several months’ worth of projections.
Reviewing cash flow statements reveals trends over time, which you can use to fine-tune your projections and inform spending decisions.
Management Strategies to Prevent Negative Cash Flow
In the end, cash flow is all about balance. Businesses that are able to time cash inflows and outflows to avoid owing more than they make are the ones able to keep going when tough times hit. Find your perfect balance with these cash flow management techniques:
- Visualize: Separate expenses into categories to see how much you’re spending, and on what. Look at percentages to determine if you’re overspending in any area and where you can cut back. Get an overview of resource allocation, as well, and see how distribution could be adjusted for greater efficiency.
- Reduce: Slash fixed costs by downsizing, outsourcing and getting rid of non-essential services.
- Manage payments: Pay bills on time to avoid penalties and late fees, and see if your suppliers or vendors offer early payment discounts. Consider adjusting invoice terms to get money from customers faster, or start asking for down payments to ensure you get some cash at the time services are rendered or orders are placed.
- Adjust payment cycles: Negotiate terms on payables to spread expenses out and prevent all of your bills being due around the same time.
- Plan for tax obligations: Set aside money on a regular basis for quarterly or yearly taxes so that payments don’t put a dent in cash flow.
- Manage inventory: Use software to keep track of what’s in stock and make predictive orders based on demand. This reduces costs related to unsold inventory, backorders and storage.
- Track your budget: Take advantage of accounting software or bookkeeping services to keep your books in order and provide detailed reports of financial trends.
- Scrutinize spending: Weigh costs and benefits of every purchase before making an investment, using cash flow projections to guide your decisions.
- Make a buffer: Set aside a chunk of money to act as a reserve, and think of this as your “zero” when budgeting. Don’t dip into it for anything other than true emergencies.
Manage Your Small Business Cash Flow with Strategic Financing
You don’t have to be one of the 68% percent of business owners afraid of losing their businesses due to lack of cash. With cash flow statements and projections in hand, you can move forward with confidence, knowing what to expect and how to plan for the unknown.
Business financing can factor into smart planning if you seek out funding in advance of an anticipated slow season or a time when you’ll be waiting for a significant number of payments. Securing funding before you need it means there will be cash in your bank account to cover expenses when overall cash flow is poor. National Business Capital offers several financing solutions for small business owners:
- Accounts receivable financing to close the gap between sending invoices and receiving payment
- Business lines of credit to provide a ready source of cash as needed
- Equipment financing to spread out payments and minimize the financial impact of large purchases
When you need help balancing cash flow from month to month, these financing options can support your business and make it possible to grow. Get in touch with National to discuss your options, and get started with the right financing to keep your business cash flow positive.