EA - How the Right Cash Flow Strategy Can Save Your Business

How the Right Cash Flow Strategy Can Save Your Business

Encountering cash flow issues might be one of the most stressful things that you face as a business owner. It can be hard to keep the company running if you don’t have enough money in the bank to pay overhead costs, payroll, and other ongoing expenses. Instead of waiting until money gets tight, it is essential you implement a good cash flow strategy right now so you are prepared for the future.

Profitability and Cash Flow

It’s easy to assume money isn’t going to be a problem if you have built your business to the level of profitability. But just because you are bringing in more than you are spending, doesn’t mean that the cash will be available at the times when it is needed. It is normal for a business to have ebbs and flows with payments that are due. For example, you might feel the pinch when it is time to process payroll, but you have a few outstanding Accounts Receivable invoices that haven’t been paid yet.

Too often, business owners feel like they are gasping for air… barely keeping their heads above water as they navigate the challenging aspect of bringing in enough money to keep up with expenses. Rest assured to know you are not alone in these cash flow challenges. An article on Entrepreneur stated that 82% of small companies and startups fail because of poor management of cash flow.

Just because you have good ideas for your new business, doesn’t mean you have the experience with the necessary accounting and bookkeeping practices that are needed. If you want to fix your business cash issues, then you need to tap into the expert advice from someone who can recommend a good cash flow strategy.

Lack of Cash Flow Strategy Could Bring Your Company Down

Even if you have a great product and customers who are interested in the things that you are offering, you won’t be able to continue with your business efforts if you can’t keep a roof overhead. The quality or popularity of your products doesn’t matter if you can’t keep up with the expenses required to keep you in business.

In fact, cash flow strategy should be high on your priority list. When you have sufficient cash flow, it enables you to focus on other business-building techniques, such as marketing, product development, and more.

Be Honest about Your Current Situation

Are you ready to turn things around with your cash flow management? Then you need to be brutally honest about where you are spending money and how the cash is moving through your account. Finances can be a stressful topic, causing many business owners to turn their attention to other business responsibilities such as employee management or product development. But ignoring the “elephant in the room” isn’t going to fix your cash flow. Instead, you need to evaluate your current situation and put together a proven strategy that will help to turn your business around.

Start by tallying your current cash flow situation. How much money is available in your bank accounts? Do you have room available on credit cards or a line of credit? Next, you need to evaluate the anticipated expenses and receivables in the future. This information will help you see the overall picture so you can determine the potential pitfalls that could leave you in a stressful situation.

The best solution is to have accounting software that calculates these numbers for you. Yes, you can do the calculations by hand on a spreadsheet. But it is time-consuming and quite a burden to keep up with ongoing calculations. There’s no reason for you to spend your valuable time on busy work when tools and outsourced services can easily take care of these details for your company.

Anticipate Upcoming Costs

Now that you know your current standing and the amount of money that is available, it’s time to consider the costs that are coming up. Certain expenses tend to come in cycles, such as tax payments and payroll. Look at the amount of money you need for general overhead costs each month. Also, list out quarterly and annual payments that you will need to meet. Creating a cash forecast for the next 12-months will give you the numbers that need to be met to ensure you can keep up with your payments.

It can be a challenge to see all of these details without evaluating the payment history. Look at the transactions that moved through your company last year. Note any transactions that you anticipate will be repeated this year. If you have the information, it can be helpful to review several years of business transactions so you can see the overall patterns and trends.

As a startup, you might not have the luxury of looking at historical information for your own company. But you can learn from the experts by talking to an accounting team that has worked with other startup companies. Your accountant will know the industry patterns and expectations. You can use this information to build in the cushion that you need to ensure cash is available at the right time.

Decrease Your Spending

Looking at the upcoming costs can be a powerful way to help you identify the areas where you might be wasting money. Is there anything that is taking too much cash? Look for areas where you can cut your spending to streamline your overhead costs.

While overhead expenses are unavoidable, you shouldn’t be spending on unnecessary line items. Distinguish necessary costs from the luxuries so you can cut back your spending and reduce the amount of cash that is needed to keep your business running each month.

Follow Up on Receivables

One common pitfall with cash flow strategy is that the expenses are coming in faster than the receivables. It is easy to be focused on product development, keeping up with monthly expenses and paying the taxes. If these accounts payable items are taking up all of your attention, then you might consider putting the focus on the money that should be coming in.

Create expectations with your clients regarding payment terms. You should have clear boundaries regarding when invoices need to be paid in full. At the same time, your business needs to have a follow-up system to ensure you are reaching out to customers when the payments are due. Too often, customers wait until the last minute before the invoice is due before sending the payments. Delayed payments impact the amount of money in your bank account, which means you might not have enough cash to keep up with inventory restocking or employee payroll to keep the company going.

One option is to offer a discount to customers who pay their invoices right away. For example, offer a 2% discount when payment is made on the day the services are rendered. Before you offer this discount, evaluate your profitability to ensure your price-point can bear the discount that will be given.

Evaluate Your Credit Options

Racking up loads of debt isn’t the best choice for you or your company. But credit can be a fail safe if you find yourself in a difficult situation for the month. The most important thing you need to consider is preparing ahead of time with this fallback plan before you are facing the immediacy of cash flow problems. If you are already too leveraged with your current lines of credit, then financial institutions will be hesitant to offer more credit to your business.

When you are in a good cash position, reach out to your bank and other financial providers. It will give you peace of mind knowing that a line of credit is available in case you find yourself in a challenging cash flow situation. Use this credit as an emergency-only option that will save your company from going under due to cash flow.

Talk to a Pro

You aren’t expected to know everything related to running a business. Sometimes it is important for business owners to swallow their pride and look for outside help. Enlisting the services of a bookkeeping and accounting team might be the best decision you can make to take control of your cash flow. These services will help you evaluate your current financial situation, look at forecasts for the things that are coming up, and determine the right system that will ensure that money is flowing in faster than it is flowing out.

If you don’t systematize your business spending and receivables, then you are almost guaranteed to run into financial problems in the future. You can get ahead of these issues by talking to our team to learn about the accounting services that are offered. We will help you create a strong foundation, so you don’t have to worry about cash flow issues in the future.

For more information, Easier Accounting is here to help. Call our team for information about the small business accounting services that are offered: (888) 620-0770

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