Cash flow can be defined as the movement of money into and out of a business, but it’s more than just that simple accounting definition. Understanding details about your businesses cash flow can help you make important optimizing decisions. Properly managing your cash flow can help you determine whether there’s enough available cash on hand to cover expenses and/or pay down debts, and how long your business could continue operating if you suddenly lost access to credit or other sources of funding.
Why is Cash Flow Important for a Small Business? - Overview
Most small businesses start on a shoestring budget, but if you’re trying to build a viable business, you need to pay all your bills without dipping into any savings. Unless you have a large monetary cushion, you need to align the money that’s coming in and going out to make sure you plan for any deviation from the norm.
Why is Cash Flow Important for a Small Business? - Accounts Receivable
To understand why cash flow is important to small businesses, you must first understand what accounts receivable are. If a customer purchases something from your company on credit and they don’t pay you within 30 days, then their payment becomes an accounts receivable. Keep in mind that your business’s finances are directly tied to its accounts receivable. If you have too many outstanding invoices, it can be difficult to maintain steady cash flow and build a sustainable business model that will continue to grow.
Reward Prompt Payments and Include Fees for Late Ones
Clients can help your cash flow if you’re willing to work with them and be flexible. When invoicing, factor in a few extra days of wiggle room so you’re not penalizing your clients who pay on time, yet also not allowing those who are slow to get away without paying their fair share. A small late fee is often enough to keep clients paying on time when they pay after the grace period ends.
Why is Cash Flow Important for a Small Business? - Accounts Payable
Tracking expenses and paying your bills on time is one of the most important things you can do to maintain a positive cash flow in your small business. If you don’t pay invoices on time, it becomes difficult to get capital from investors or loans from banks. Your suppliers and employees are going to be reluctant to work with you, too, if they aren’t paid on time.
Tips for Managing Your Small Business Cashflows
Find Accounting Software
One way to get a grip on your cash flow is to use accounting software. QuickBooks is a popular accounting software that can help you keep track of your cash flow throughout the month. When you’re able to see how much money you’re bringing in vs. how much money you have going out, you’ll be better equipped to handle any issues that arise before they start impacting your bottom line.
Establish a Line of Credit
Establishing a line of credit with your bank will give you a way to ensure that you always have cash on hand. If you know that when payday rolls around, you’ll be short $2,000, applying for a line of credit can help solve that problem. A line of credit is essentially just an advance on your paycheck. While it’s important to pay back whatever money you’ve borrowed, it doesn’t necessarily need to be paid off immediately as long as your payments are on time and in full.
Get Paid Digitally
Most small businesses still accept check or credit card payments. If you’re using one of these payment methods, there’s no automatic way to manage your cash flow. If too many customers pay with checks, or if you don’t charge enough on cards to meet expenses, you may find yourself short on cash. A great way to monitor your cash flow is by receiving digital payments. Getting paid this way is often faster and can help you avoid cashflow issues.
Have A Backup Fund
It’s important to build a small buffer fund (also known as an emergency fund) as part of your cash flow strategy. This will ensure you can manage small “emergencies” as they come up without having to make major shifts in your business.
Be Strategic in How You Pay Your Bills
Ideally, you have a steady stream of revenue coming in to pay your small business’s bills. But sometimes things get in the way and your cash flow can take a hit. In those instances, you’ll need to be strategic about how you pay them back so you can put yourself on more stable financial footing. One of the first things to do is look at your outstanding invoices – especially those that are due within 60 days – and prioritize who gets paid first.
You may also be able to negotiate with your suppliers for payment options that best fit your cashflow and business goals. Be transparent about your needs.
Proper Accounting Helps You Make More Informed Business Decisions
Keeping your books in order isn’t just important for making sure you follow all relevant tax laws—it can also help you plan future business decisions. If you have proper accounting systems in place, you’ll be able to assess where your business stands financially at any given moment and easily make more informed decisions about how to proceed. This means that even a small-business owner who’s on a shoestring budget can take advantage of better data-driven planning and management.
If you’re interested in getting help managing your cash flows and planning your overall business strategy, contact our team at Free Weekends. We can help you map out plans and manage your processes to help your business thrive and grow.