Cash Flow & Your Small Business

If your business is a living, breathing entity, cash flow is its lifeblood. You may get excited as money flows in, but money will inevitably flow out, as well. The key is ensuring you’re monitoring and managing your business’s cash flow so that you quickly identify any problems.

When you started a small business, your goal was likely to make money. Before that money starts rolling in, though, you’ll have some expenses. Those could include everything from software to marketing to a monthly lease for your retail or office space.

Business cash flow refers to the flow of cash through your small business. Ideally, the money you make on your products, known as the gross profit, will exceed your expenses, which will give you a net profit. But as important as it is to have a net profit, it’s even more important to monitor and manage your cash flow from one month to the next.

Good cash flow management starts by having a constant grasp of how much you’re bringing in and how much you’re spending. There are plenty of accounting software solutions that can help you do that, but you may also find your bank offers reports that will show you what you’re spending and making. One important step is making sure you have a bank account dedicated solely to your small business and limiting all business-related expenditures and income to that account.

But to really keep an eye on things, you’ll need to draft a cash flow statement on a quarterly, if not monthly, basis. The Small Business Administration can help with its accounting tips and templates. But in general, your cash flow statement will include:

• ​Assets:​ Includes cash in bank accounts, cash receipts, accounts receivable, equipment, inventory and raw materials.
• ​Liabilities:​ Includes accounts payable and debts owed.

​Read More:​ What Resources Are Available From the SBA?

Once you understand your business’s cash flow, it’s important you have processes in place to keep an eye on it. The easier you can make it, the better. If you’re starting a new business, you’re at an advantage because you can shop around for software that will show you, at a glance, how your business’s finances are doing every single day.

It doesn’t matter how you monitor your cash flow as long as you do. Some banking apps and accounting solutions will send you daily alerts or simply notify you when your bank balance drops below a certain range. At the very least, you should make sure you have a dashboard that you can log into every day to check your funds.

Another option is to hire a professional bookkeeper to help you with your books. With professional bookkeeping, you’ll pay someone to not only keep your books, but also to advise you on ways you can improve cash flow to strengthen your business’s financial position.

No matter how successful a business is, cash flow problems can put a kink in things. Small business cash flow can be especially vulnerable to issues since these businesses typically don’t have teams of investors backing them. Here are some of the most common cash flow issues that small business owners face.

• ​Overspending at startup:​ It can be tough in the early days to gather the working capital necessary to get things started. If you don’t have enough cash, you might find yourself going into debt, putting yourself deeper in the hole before you can start making money.
• ​Inaccurate budgeting:​ Determining your cash inflow and cash outflow can be tough at first. Over time, you’ll get better at that, but it’s important to set and tweak your budget constantly in the early days.
• ​Undercharging​: Pricing your products or services is one of the important decisions you’ll make. It’s important to ensure your profit margins are high enough to meet your business needs but low enough to keep you competitive within your market.
• ​Slow-paying customers:​ Effective invoicing is one of the most critical parts of keeping cash flow strong. Late payments can severely limit your ability to see a positive cash flow. Make sure your payment terms are clearly stated and there’s a “pay by” date listed on every invoice.
• ​Seasonal changes:​ Many businesses have slow times of the year, but some see more extreme changes than others. Overspending when you see profits rolling in could come back to bite you. In the early years, it’s important to spend conservatively until you get a better feel for those seasonal ups and downs.

If you work with investors, they’ll often want to know your cash position, which is the amount of cash you have on your books at any time. Increasing that number is a great goal as you push your business toward profitability. The key is to reduce your expenses and increase your revenue to ensure you have a little wiggle room for those slow periods.

Here are some tips to help you boost your business’s cash flow:

• ​Improve payment turnarounds:​ Slow-paying customers can put your business in a bad position. Help the process along by invoicing as soon as possible after products or services are provided. Try to make paying easy by including payment links with the invoice and offering multiple ways to pay.
• ​Send late payment reminders:​ Some clients simply won’t pay on time. For that, you need to have a plan for sending late payment reminders. Incentivize customers to pay on time by cautioning them that a late fee will apply after an invoice is a certain number of days late.
• ​Minimize debt:​ Lenders may be happy to help you through some tough times, but try to avoid getting into debt. Paying off those loans, along with interest, will make it tougher to reach and maintain profitability.
• ​Consider price increases:​ From time to time, take a look at what you’re charging and consider a price bump. Your costs will increase, so the price for your offerings should, as well.
• ​Get creative with bundling:​ There are ways to boost sales that don’t require pouring a bunch of money into marketing. You can bundle your products or services or offer a sale to customers to incentivize them to buy more than one product with each purchase.

​Read More:​ Set Your Freelance Rate

Despite your best efforts, there may be times you find yourself in a pickle. Check to see if your bank offers a line of credit that you can fall back on if necessary. You’ll still have to pay interest, but you’ll at least have a way to take a small amount if you need it.

Another option for short-term cash flow issues is a credit card. You can find credit cards that can help you get through instead of using your personal cards to fund your business. Lastly, there are government loans for small businesses that can give you a hand.

​Read More:​ What Is a Cash Shortfall?

Hopefully, your business will never find itself in a negative cash flow position, but monitoring and managing it can help even if you do. With so many solutions now available to help, small businesses can easily learn to manage cash flow without having to hire a professional accountant or bookkeeper.