Cash flow refers to the money that flows into and out of your company that is income and expenses. Cash flow is the ability to pay your bills, meet your employer and tax obligations, and have enough cash available at the right moment.
You can simplify your business cash flow management by paying more attention to your records and reporting. You can plan for the future by managing your cash flow.
Make a Projection or Budget for Cash Flow
A cash flow projection or budget is the best way to ensure you have enough cash to pay your taxes and other obligations. This will allow you to:
- Monitor your cash flow position anytime
- Identify any fluctuations that could lead to cash shortages
- Plan for your tax payments
- Plan for major expenses
- Provide additional information to lenders
Accounting for different types of budgets or expenses can be a great way to keep your business running smoothly. It will give you an overview of when money can come in and go out, and highlight where you might need to spend your money.
When creating your cash flow budget, there are three things you should consider:
Timing
You can’t just set up a cash flow budget and leave it at that. You have the option to make your budget monthly, quarterly, or annually, depending on what is most important or useful.
Keep an eye on your budget and make adjustments as your business grows.
Be aware of significant differences between the budgeted amount and the actual results.
Costs
Include all fixed expenses and other variable costs. These include rent, insurance and utilities as well as wages, equipment, and taxes like PAYG (pay as you go) installments or goods and services tax.
Income
- To help you track income and operating expenses, you should estimate your income when you start out.
- After your business has been in operation for some time, you can get a better idea about the potential business income.
- This amount should be conservative to allow for some flexibility in the event of unexpected or more expensive expenses.
The results of your budget control strategies will assist you in making business decisions.
How to Maintain Cash Flow within Your Business
Cash flow refers to both the cash that enters the business and what is left. Cash inflows include payments received from clients or customers for products and/or services, interest payments, and any other receivables.
Cash outflows can be anything the business needs to pay aside from on credit, such as payroll, leases, taxes, and other business expenses. Even though the company’s income statement might appear to be healthy, if the cash flow management is poor, the business could find itself in serious financial trouble.
- Discuss terms with vendors. If clients have to pay within 30 business days, the terms you negotiate with vendors should be identical. Vendor payments should be made on receipt if client payments are to be made within thirty days. Otherwise, cash flow problems are likely. Never pay in advance. Always pay according to the vendor’s or supplier’s payment terms. Do not pay the vendor until you receive the invoice. Enjoy the 30-day grace.
- Offer incentives to prompt payment if the customer receives products or services after they have paid for them, you can offer a small discount and bonus if they pay within the first 10 working days. This creates urgency for customers to pay the bill on time. A small discount is sometimes offered to customers in order to make payment quickly.
- If your company is growing financially, it’s a good idea to open a bank business line of credit. Banks will not lend money to businesses if they see your business in financial trouble. If you secure the line of credit during times of prosperity, you provide a safety blanket for the future and make it easier to get the line.
- If you order custom merchandise that you won’t be able sell to others, ask for deposits. When custom embroidering 100 T-shirts for a local company, make sure you pay the full amount upfront. This prevents you from having 100 shirts that aren’t usable and creates a negative cash flow.
- If your inventory is still sitting in the store you will not improve cash flow. Keep track of inventory turnover to ensure that products are constantly leaving your store. Talk to the supplier if you are not satisfied with a product or product line. If that fails, then you may be able to sell the product at a discount so that another more profitable item can be placed in its place.
Understanding How Cash Flow Affects Your Business
A lack of adequate cash flow management in your business can be one of the biggest reasons why businesses fail.
It’s important not only to record your company’s cash flow but also to understand how it impacts your business.
Additionally, cash and profit are two different concepts. Profit is an accounting principle to achieve financial gain. Cash is your actual money.
For example, you sent an invoice of $500 to a client for work done. Some companies will immediately recognize a $500 profit when they send you the invoice. You will not receive the $500 cash until your collection is complete.
Companies that cannot collect past-due invoices and reconcile receivables can see a decrease in cash flow. Clients that pay late or not at all can impact your ability to pay your debts and run the business efficiently.
If you have negative cash flow due to client payment issues, and don’t pay your obligations on time, this could impact your ability to obtain a loan for the future.
Your company’s growth potential is also affected by cash flow. Positive cash flow means you have more capital available to invest in new machines or locations for your business expansion plans. You have more money to invest the more cash you make.
Negative cash flow can also force you to spend your cash reserves on paying creditors instead of investing in your business.
