January 19, 2021

A Balancing Act: Cash Flow Management

Woman on mobile device

Author: Dahna Chandler 


A high volume of sales may make you feel profitable, but that’s not the same as having strong cash flow. After all, you can appear profitable at certain times, but be in the red in others. 


It’s only by proactively balancing how you manage your cash flow—revenue, expenditures and profits—that you have cash to maintain business operations consistently.  That, then, allows you to take advantage of opportunities to invest in growth. 


Operating your business proactively, instead of defensively, requires formalizing your cash-flow management. Doing the following can help place your business in a position of excess cash flow.


Choose the right cash flow management tools for your business


You need cash flow management tools to show you what happens to your cash flow when you make or accept payments. The tools you select depend on the size of your business and the direction you’re going. For example, different tools may be more appropriate if you’re a solopreneur selling coaching services than if you’re scaling your retail enterprise.


It’s important to know if your accounting software includes the cash flow statement and cash flow forecast types you need to help you make decisions about your business. For example, these tools can help you need to track cash flow in different currencies. If you purchase separate tools, make sure they integrate seamlessly with your accounting system.


Think about the cash flow questions you need to answer about to help you make business decisions. Those questions can be basic or sophisticated and include:


  • How much money do I have on hand, and how much am I expecting?
  • Can I afford to buy more supplies or inventory?
  • Can I hire personnel or contractors?
  • Am I getting paid on time by my customers?
  • Am I paying all my vendors and creditors on time?
  • Should I change payment terms to get paid faster?
  • Can I afford new technology?
  • Can I expand my sales territories or accept larger clients or orders?
  • Can I weather a crisis in my business or the economy?

The questions you ask will vary can be endless, depending on your business. Make sure your cash management tools can help you answer them accurately.


Monitor cash flow consistently


Depending on your business or your growth goals, you’ll want to monitor cash flow daily, weekly, or monthly, but should do it at least monthly. This way you’ll know how your customers pay you and when, and whether you’ll have cash to meet obligations on time.


Your cash flow statement, which measures your cash on hand at particular points in time, can help you do that. It tracks inflows like receipts from sales or other accounts receivable, financing, or funding and outflows, including bills, debt payments, taxes and payroll. Maintaining a cash flow statement helps you determine when you have positive or negative cash flow and shows you where you must change to ensure consistent positive cash flow.


To make projections of your cash flow in the upcoming month, quarter, or year, you’ll want a cash flow forecast. This tool is essential for helping you identify potential cash flow problems and take steps to prevent them. Use data from your cash flow statement, like customer payment patterns and business expenses, and from sales projections, and inventory plans to make accurate forecasts.


Manage receivables effectively


Ideally, you'll want to turn materials and supplies into products (or skills into services), inventory or services into receivables, and receivables into cash as quickly as possible. Making it easier for your customers to pay you on time regularly is key to keeping cash on hand to do enable that.


Make sure you invoice promptly with clear payment terms and procedures, but understand how clients prefer to pay so you’ll get paid faster. Consider using your accounting software to manage invoices so they get sent out on time and regularly, and you can track late payments automatically. Then examine the way your customers pay and determine other ways you can streamline the process to get payment faster.


Among the ways to make that happen include:


  • Get partial or full payment in advance.
  • Before offering new customers credit, check their reputation for on-time payments or do a credit check.
  • Use a payment processor or money service provider that gets payments from receivables to you the fastest for the lowest fees.
  • Consider offering discounts to customers who pay early.
  • Stay on top of unpaid invoices and work to collect those past due.
  • Sell off old or outdated inventory at a discount.
  • Track slow payers and decide if you should change payment to cash on delivery, advance payment or some other method or simply stop doing business with them.

Remember to record receivables accurately in your cash flow statement and cash flow forecast. They can make it easier to identify payment challenges and solve them. Also, talk to others in your industry or accounting professionals to identify other ways to get paid faster.


Consider your payables strategies


It’s easy to get complacent about your cash outflows by keeping sales growing, but that can hide problems that can hurt your business later. Stay on top of your expenses so they don’t grow faster than sales without your noticing on time. Tracking these payables in your cash flow statement and determining how they affect your cash flow forecast is essential.


There are several ways you can get payment terms that help you keep cash in your business longer, while paying your vendors and creditors on time.


  • Avoid paying invoices too early (unless you get discounts for that) and try to pay them the last day they’re due.
  • Focus on flexible payment plans over the lowest prices with suppliers.
  • Understand vendor payment policies so they don’t hurt cash flow, like by charging fees for certain payment types or penalties for paying debt too early.
  • Discuss your financial situation with suppliers or creditors if you must pay late, so you build and maintain trust with them.
  • Track your expenditures to identify those that are too costly or unnecessary, then cut accordingly.


Identify industry-specific payables strategies that facilitate cash flow maintenance for your business type. Also, communicate any payable strategies you’re using with your accountant or bookkeeper. It’s essential you don’t run in to tax or other problems trying to meet payment obligations.


Cushion your business finances to survive shortfalls


Sometimes, you can find yourself in unexpected situations where expenses outstrip revenue, and that can threaten the survival of your business.  Be ready with 3-6 months of expenses in an emergency business savings account or a line of credit you apply for long before you need one. Also, look for investor funding to meet cash flow needs or grants you can set aside for that purpose.By using your cash management tools, though, you can hopefully identify potential shortfalls before they become big problems.


Photo: Getty Images

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