5 Tips for Small Business Cash Flow Management
Every small business aims to reach profitability, and rightly so. You simply can’t spend more than you bring in indefinitely. Companies that don’t eventually become profitable become insolvent.
But even more important to your business’s very existence is cash flow — so much so that even profitable companies that can’t properly manage their cash flow can still go under.
Profits are effectively an accounting term. At the most basic level, profits are simply revenues minus expenses. But that theoretical view ignores that revenues aren’t immediately converted into cash, nor are expenses immediately drawn down.
That’s where cash flow comes in.
Cash flow is the actual inflow and outflow of cash your business records over time. Simply put: Your company can be theoretically profitable over the whole year, but if you don’t have cash in March to pay off expenses due in March, you’ll still be in hot water.
Consider a $100 annual subscription fee, paid every December, for work-productivity software. Yes, you must account for that $100 in annual expenses, and it will affect your profits. But it’s not a hit against your cash until you actually pay for it in December.
Cash flow management, then, is critical to the survival of your small business. To help out, here’s some advice for staying on top of your cash month in and month out.
Small Business Cash Flow Management Tips
- Properly Monitor It: You can’t do anything about your cash flow if you don’t keep regular, accurate records of your inflows and outflows. Accounting software programs, such as QuickBooks or GoDaddy Bookkeeping, can help you stay on top of your financial records. In turn, you will be better positioned to keep regular tabs on your cash.
- Stay on Top of Invoices: Small businesses already had a problem with collecting invoices before COVID-19 hit. Specifically, pre-COVID, more than a third of all invoices were paid late. These tips for quicker invoice collecting should help.
- Lease Equipment: Leasing equipment might be a bit costlier in the long run. But it has two important benefits from a cash flow-management perspective. For one, it keeps you from tying up a large amount of cash all at once. Also, leasing newer equipment with warranties and other protections will keep you from having to absorb as many one-off costs for sudden repairs or other issues.
- Reward Early Payments: This advice is aimed at companies that already have strong profit margins but have difficulties keeping cash steady. If you provide a small discount for customers who pay invoices early (or even, say, using an automatic regular payment system), you can better ensure that you have cash in your pockets when you need it most.
- Secure a Business Line of Credit: You can’t foresee everything. Emergencies and other negative one-off events will happen over time. That’s why many small businesses should try to secure a business line of credit before they actually need one. That way, you can immediately access it as you have issues, rather than risk being denied for one at the moment you need it most.
Cash flow management clearly is more difficult than merely planning a path to profitability. Fortunately, McManamon & Co.’s accountants are proficient in helping small- and midsized businesses with not just managing their cash flow, but providing advice about how to improve it over time.
Cash is the lifeblood of your business, so make sure it’s flowing properly. Call us at 440.892.8900 or contact us online today.
Tags: accounting, small business, small business accounting, small business finances | Posted in accounting, McManamon & Co., small business