It may be the New Year – but there are plenty of things that stay the same no matter the date on the calendar. Foremost among those? The importance of cash flow management. Keeping tabs on your business’s cash flow and taking steps to be cash flow positive.
If you resolve to do one thing this year for your business, we at PayPie recommend you start implementing cash flow management strategies. These are the ones to follow.
Remember why cash flow is so important
A friendly reminder that 60% of small business owners cite cash flow issues among the reasons why their companies have failed. That’s many. But, at the same time, more than 80% who perform monthly cash flow forecasts survive. Coincidence? No way.
If you’re not thinking at all about cash flow management strategies, then you’re unnecessarily putting your business in danger of going under. Especially because it’s not difficult to keep track of your cash flow.
Remember that cash flow is a matter of cash in and cash out, and knowing that margin between them. It’s all a matter of keeping expenditures and incomes monitored, and understanding the cash flow strategies to augment them both so you can get that margin exactly where you want it.
Follow smart cash flow management strategies
There are a few different ways you can manage your cash flow. But, start with these to have the broadest effect.
1. Change how your customers pay you
Part of your cash flow equation is understanding the patterns of your money that comes in. That means knowing a lot about how your customers pay you. For instance, how often do invoices come in? Are customers often on time, or late and miss their due dates? Do you have to chase down payments or are your customers reliable?
If you collect on trade credit, this is an especially important consideration. That window of time between when you deliver your goods or services and when you actually collect on them makes all of the difference for your cash flow. And if your inflow varies wildly month to month, you could be playing with fire.
With that in mind, a crucial cash flow management strategy is to evaluate the terms on which you offer credit. Are you currently offering Net 60 or Net 90 terms? Perhaps consider shortening the terms on which your payment is due. Another effective approach is to offer incentives for customers to pay early.
For instance, a common discount is 2/10, or 2% off the price of the invoice if paid in 10 days. It’s worth giving up 2% of your invoice cost in order to have cash in hand sooner. You can also potentially consider asking for a percentage down if you can’t change the net terms.
Remember: Your goal is to create a more consistent, reliable system to be able to estimate cash flow.
2. Evaluate your own payment terms
Let’s flip that idea now. Are your own payment terms fair and suiting your business?
If you have vendors that you consistently patronize and pay on time, consider renegotiating your net terms. If you’re currently paying someone Net 30, ask for Net 45 or Net 60, for instance. Or, if you’re currently paying on delivery, ask if you can deliver a portion of your payment on Net 30 instead. This will help alleviate your outflows, and allow you a window in which to pay that is best for your own cash flow – like paying after payroll has been processed, or your small business loan payment has gone through for the month.
Don’t forget that you’re only going to be able to negotiate more favorable terms if you’ve been good about getting your payments in on time – so, if that’s not the case, make it a priority in the New Year, understanding there are long-term benefits from being a good client yourself.
3. Know your cash flow margin
For every dollar you take in, how much goes out? Calculating your cash flow margin can help you figure out how much wiggle room you have, and the kind of cash flow management strategies you’d be best to implement. The simplest way to calculate your cash flow margin is to take your operating cash flow (which you can find on your cash flow statement) and divide it by your sales (which is on your income statement).
You might be surprised to hear this, but the average business owner has only a $7 cash flow margin. That’s not a lot of difference. If there are months in which payments don’t come in or your sales are lower than expected, you can quickly come into emergency territory. Calculating your cash flow margin regularly can help you see patterns as well as focus your operating activities in on something like lowering expenses, ramping sales, or collecting on invoices faster.
4. Learn to anticipate
No, you’re not a psychic – and we’re not telling you to become one. Business means lots of unforeseen issues, many of which you have to deal with as they come.
However, that’s not always the case. History has a tendency to repeat. For instance, if you keep coming up short for bills, or your raw materials cost fluctuates, there’s a chance that many of these problems are cyclical, or have specific causes. Maybe your material and labor costs are higher in a certain season or tied directly to trade policy. Maybe there’s a certain customer who doesn’t pay on time regularly.
The best thing you can do from a cash management strategy standpoint is to analyze your business performance trends and anticipate when you’re going to have your highest and lowest amounts of cash flow. Being proactive instead of reactive will serve you extremely well in the long run.
This also means regularly talking to people who oversee different parts of your operation, including your bookkeeper/accountant, sales manager, and more – only through understanding each part of your business intimately can you anticipate problems before they hit. It takes a village!
5. Perform monthly cash flow forecasts
If you’re not performing monthly cash flow forecasts, you need to. (In fact, if there’s one cash flow management strategy that you put into place immediately, it’s this one.) How else are you going to understand your cash position, see trends, and understand the changes you need to make?
Remember that your cash flow forecast is different from your statement of cash flows. But you need both to be able to see your current and historical information. A monthly cash flow statement will help you see how your accounts receivable and accounts payable are impacting your business’s cash flow, plus get a picture of how your debts, like business credit cards and business loans, affect your surpluses and deficits.
Create a powerful cash flow management arsenal
Have some strategies to implement? Great. Now make sure you have the right tools in your toolbox, too. Part of this is having a strong relationship with your financial team, so every time you check in with them they’re able to give you the information you need – and they can give you a heads up when you need to put specific cash flow management strategies into action.
The other piece to give you the strongest possible insight into your cash position is to adopt a tool that enables you to monitor your cash flow in near-real time. After all, you can’t refute numbers, or find yourself going in the wrong direction unconsciously if you’re using data as the basis of your management decisions.
Connect your business and start monitoring your cash flow ASAP. PayPie connects right into your accounting tool and provides a dashboard to help you understand your inflows, outflows, and general cash position.
PayPie currently integrates with QuickBooks Online and was a 2018 Small Business App Showdown Finalist.
The information in this article is not financial advice. This content is general while every financial situation is unique. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.