Effective cash flow is critical for every business’ financial health and sustainability. Poor cash management can strain operations, limit expansion and potentially lead to business failure. Implementing these 7 cash management tips can help businesses of all sizes make informed decisions, mitigate risks and capitalize on opportunities.
Keep a pulse on your cash movements
The first thing to do is have a complete understanding of your business’ cash flow situation. You might have to do a little research to obtain a cash flow statement and forecast to better understand cash flow. Here’s a breakdown of each financial document:
- Cash flow statement: This is, essentially, a bank statement. It will give you a view of your cash situation at a certain point in time (it’s typically prepared at the end of each month) and acts like a snapshot of the cash that’s flowed into your business, including revenue, profits, financing, etc. It also shows all the cash that has flowed out, such as bills, inventory, hard costs and debt repayment.
- Cash flow forecast: This provides insight into many of the same elements as a projected forecast for the months ahead. It’s an invaluable financial resource for helping predict upcoming expenses or problems before they happen.
Ensure your customers pay their invoices
One of the biggest obstacles impeding business cash flow is unpaid invoices. One study showed that 49% of the invoices produced by businesses in the U.S. go on to become overdue. With so much money waiting to be collected, what can be done? The answer is simple. Help your customers pay you faster and on time. Here are a few ideas to help minimize the gap between invoicing and payment:
- Invoice customers promptly. Don’t put off sending invoices until the end of the month. Instead, send them as soon as the work has been completed. If the project is large or ongoing, consider arranging a monthly or milestone billing system to keep the cash flowing throughout.
- Create clear, concise invoices. You might not think clarity and neatness would be a factor in your invoices, but it can be. Your invoices should be simple, with imported details, payment preferences and terms all organized clearly and in easy-to-read fonts.
- Set up preferred payment options. The best way to get paid faster is to offer (or set up) payment options that work best for your customers. Whether it’s direct deposit or a payment app or something else, find out what your client prefers and make sure you are set up to easily accommodate invoice payments.
- Use an invoicing and billing tool. This is a smart option to streamline your invoicing process. Most of the top invoicing software options for small businesses feature a range of tools that make it simple to generate invoices, track payments, chase collections, issue reminders, and integrate with your bookkeeping.
Stay on top of aging invoices
In addition to diligently pursuing prompt and consistent invoicing, it’s important to establish a billing system to help keep track of invoices nearing their outstanding date. Whether you use an Excel spreadsheet or invoicing software, having a reliable system to help you track down payments is a solid way to keep your cash flow moving swiftly — and in the right direction.
Separate your personal and business finances
This might be easier said than done, but separating your personal and business finances is essential to understanding your business’ cash flow and financial reliability. Ultimately, mixing the two will lead you to uncertain conclusions about your business’ performance. By keeping your personal and business finances separate, you’ll know how much cash your company is generating, which puts you in a better position to use excess cash to strengthen and grow your business.
Build a financial reserve
One way to avoid any potential cash flow problems is by building and maintaining a cash reserve into a business savings account. This isn’t always easy, especially if you are worried about not having enough cash in the first place, but saving every little bit as often as possible will pay off in the long run. Most financial strategists recommend setting aside 3–6 months’ worth of operational expenses for unforeseen expenses and emergencies. Building a reserve like this depends on your specific cash flow forecast needs and comfort level.
Be strategic about your business growth
It may seem contradictory, but the rapid growth of your business can lead to cash flow issues. For example, securing that big, new contract may ultimately mean better revenue in the long term. However, it can also require investing in new employees, equipment, or inventory in the short term, which can eat up your available capital.
So, what’s the solution? Be strategic in using your available cash flow and keeping an eye on your forecasted projections. You may even need to pay yourself a little less at first. However, in the long run, it will put your business on the path to success and, ultimately, put more money in your pocket.
Secure a line of credit
Another source of cash reserves worth considering is a business line of credit. Unlike a traditional loan, a line of credit offers more flexibility and can be used in many helpful ways, such as hiring, purchasing inventory/equipment, payroll, or as a safety net in the event of a cash flow crisis. When securing a line of credit, businesses should consider factors such as interest rates, fees and their creditworthiness.
Zions Bank’s Treasury Management team can assist with concierge-style services and guidance to help your business maximize liquidity, optimize cash flow and manage risk. Learn more about Zions Bank Treasury Management solutions, or schedule an appointment with a banker near you.
