Managing cash flow is the lifeblood of any small business. It’s like the heartbeat of your enterprise, keeping your dreams alive and kicking. But sometimes, cash flow management can feel like a never-ending game of whack-a-mole. Money comes in, money goes out, no one is sure what’s happening at what time and things get really stressful, really fast. Did your taxes get paid? Your vendors? Yourself?
As financial advisors, one of the most important things we stress to small business owners is the importance of cash flow management. Poor cash flow management can lead to serious financial difficulties, even for otherwise successful businesses. In this article, we’ll share some tips and tricks to help you manage your cash flow effectively and avoid some of the most common pitfalls.
1. Keep a Close Eye on Your Accounts Receivable
One of the most common issues we see with small businesses is that they don’t pay enough attention to their accounts receivable. In other words, they don’t keep track of the money that their customers owe them. This can be a serious problem, as overdue payments can seriously impact your cash flow.
To avoid this issue, it’s essential to keep a close eye on your accounts receivable. Make sure you have a system in place for invoicing your customers promptly and following up on overdue payments. For example, you might want to consider using automated invoicing software that can send reminders to customers who are late on payments. No one wants to act like a collections agency, so consider an automated system or outsourcing the task to someone who can handle it with consistency.
2. Separate Your Business and Personal Finances
This is non-negotiable. We highly recommend that you separate your business and personal finances for cash flow purposes. Intermingling business and personal finances can make it difficult to accurately track and manage your cash flow, including profit, loss, and expenses.
By keeping your business and personal finances separate, you can more easily track your business income and expenses, ensure that you have enough cash on hand to cover your business obligations, and minimize the risk of costly errors and financial complications.
Separating your finances also makes it easier to file taxes and apply for financing, as you will have clear, organized financial records to support your business activities.
3. Cut Unnecessary Expenses
This tip sounds obvious, but expenses can get out of control in a hurry. As business owners, we have been taught that we need to spend to grow. So, what many folks do is pile on expense after expense until they’re hemorrhaging money. Then they wonder why they have no profit left in the business at the end of each month. But the numbers don’t lie, and eventually you can’t justify the extra expenses.
That’s why it’s important to do an audit of your business expenses every quarter or six months (at least) to make sure you aren’t shelling out more than your business can afford to give. Plus, cutting back on expenses is one of the easiest ways to improve cash flow and turn more of a profit.
Business owners are always so focused on growing, growing, growing… but forget that a dollar saved is a dollar earned. Why not keep more of the money you already have IN your business, rather than trying to always generate new business to cover the existing costs?
4. Put Your Taxes Aside First
Not paying yourself is one thing. Not paying the IRS is another, and as you can imagine, they don’t take kindly to it. If you’re late on your taxes or behind, you could face underpayment penalties. But that’s not even to mention the stress you’ll have when you get your generous tax bill at the end of the year.
Whenever you get paid, make a point to put 20% of that income into an account earmarked for taxes right away. You know how the saying goes: Out of sight, out of mind. You can’t miss the money from your account if it seems like it was never there.
5. Maintain a Cash Reserve
Unexpected expenses or changes in your business operations can impact your cash flow, and having a cash reserve can help you weather these challenges and avoid serious financial difficulties.
For example, you may experience a sudden drop in sales or an unexpected expense, such as a major equipment repair or legal fee. If you don’t have a cash reserve, you could be forced to take out a loan or rely on credit cards, which can lead to high interest charges and financial stress. But, having a cash reserve can provide you with the flexibility and security you need to navigate these challenges and maintain a healthy cash flow for your business.
As a general rule of thumb, it’s recommended to have at least three to six months’ worth of operating expenses in your cash reserve, although the specific amount you need may vary depending on your business’s unique circumstances.
6. Set Up a Reliable Payment Schedule for Your Vendors, Contractors, and Suppliers
As a small business owner, you must pay your suppliers, vendors, or contractors in a timely manner to maintain good relationships with them and keep your business alive and thriving. But, this can be difficult if your cash flow is tight. One solution is to negotiate payment terms with your suppliers. For example, you might ask for a longer payment term or a discount for paying early. But, at the very least, you should have a set schedule each month or quarter on which you pay each support staff or supplier. Try to keep them all around the same time for ease of management and accounting.
7. Leverage Financing When Appropriate
Sometimes, even with effective cash flow management, small businesses can struggle to meet their financial obligations. In these cases, you may consider using financing options, such as a line of credit or small business loan. These options can provide you with the cash you need to meet your financial obligations and keep your business running smoothly.
For example, let’s say you run a small retail store and you’re struggling to keep up with your rent payments. By taking out a small business loan, you can get the cash you need to cover your rent and avoid being evicted. This can give you the breathing room you need to get your cash flow back on track.
Always be sure to find the best terms for your situation. If it is a loan that can be repaid in a short period of time with a high probability of certainty, a non-collateralized short-term loan might do the trick. But, if you aren’t sure when the working capital will be replenished, you may opt for a safer, lower risk option like a line of credit. Always consult with your financial or business advisor before making major moves like this to make sure you aren’t hog-tying yourself or your business just for quick capital.
8. Work with the Pros at Trivium Point Advisory
It’s important to seek professional advice when it comes to managing your cash flow. The financial advisors at Trivium Point can help you identify potential cash flow problems and develop a plan to address them. They can also help you navigate complex financial issues, such as tax planning and budgeting. In fact, our specialty is that we can handle it all for you under one roof. No more aggregating a financial team with pros from different offices. We keep track of everything for you in one place.
For example, let’s say you’re a small business owner who is struggling with your cash flow. By working with Trivium Point, you can identify the root cause of your cash flow problems and develop a plan to address them. This might involve renegotiating payment terms with your suppliers or cutting costs in other areas of your business, or maybe setting up a new cash flow management system to ensure you and your business remain healthy. And of course, making sure you aren’t overpaying in taxes, as well.
Cash flow management doesn’t have to be an overwhelming task. With the right strategies in place, you can keep your small business’s finances in tip-top shape and keep building at the same time.