Cash Flow Management Tips Every New Business Owner Needs
As a new or prospective business owner, cash flow is probably one of the first things on your mind.
To run a successful business, a business owner has to be completely on top of where the money is coming from and where it’s headed. This is no easy task.
Late payments, a slow business month, and unexpected expenses all cut into your cash flow, and eventually, your profit margin.
But the good news is that none of these obstacles need to break your business. With a little forethought and planning, you can stay ahead of any issues and ensure a successful cash flow budget.
To get a head start, here are eight tips for managing your cash flow.
Cash Flow Budget
Budget. Have one.
It can be tempting in the early days of a business to simply let money come in as it will and go out as it will. This laissez-faire attitude toward budgeting will have you in ruins in no time.
Managing your cash flow budget wisely is about knowing where your money is coming from and where it is going. All the time.
Sit down with an accountant (more on why you need one in a moment) and devise a budget. Include every expense, from salaries to business taxes to the amount spent on coffee in the break room.
If the money goes out, it needs to be on the budget.
Also include cash you expect to come in, such as payments from current clients.
Budgets aren’t ironclad. Situations arise and sometimes budgets must be modified. This isn’t a bad thing, it’s just reality.
Having a budget simply gives you a realistic overview of how your cash flow should be working. This gives you the ability to see problems before they arise and take advantage of a surplus that’s head your way.
Set Achievable Goals
While you’re setting your cash flow budget, take the time to set cash flow goals as well.
Cash flow isn’t necessarily a goal as much as a process, but having goals regarding the financial future of your business will give you an idea of how your cash flow should function.
Depending on your specific financial goals, you will spend your money differently and approach both income and expenditures slightly differently.
A solid set of goals helps keep you mindful of your assets. If you can anticipate the day you will begin to make a profit and the steps you must take to meet that goal, you are likely to handle your initial capital accordingly.
You shouldn’t confuse cash flow with a profit margin. This is a common misconception that should be avoided. That said, having clear financial goals for your business helps keep your cash flowing the way it should.
Have An Emergency Plan
Every business, from the local bistro down the road to huge conglomerates, have moments of financial instability.
Even so, smaller businesses are likely to feel the pinch a bit more than say, an automotive company or bank.
When it comes to a cash flow budget, it’s ideal and even necessary to have an emergency plan.
Whether this is cash reserves set aside for an unexpected expense or a loan already on tap for an emergency, you must know what you will do in case unforeseen expenditures come up.
No one likes to consider the sorts of possibilities that send businesses under, but without adequate preparation, one broken pipe or unpaid invoice can bring your cash flow to a screeching halt.
Outsource Your Financials
There is very little excuse for a business owner to be doing their own accounting.
For one thing, unless you studied finance at university, you’re unlikely to have the expertise necessary to do it effectively.
For another, as the owner of a company, you run the risk of being “too close” to the situation in terms of investment, which means that you may end up making riskier decisions than might be deemed wise.
Hiring an accountant as early on as possible is a good idea. An accountant will handle your cash flow budget and ensure that your business in on the right track, without you having to obsess over the spreadsheets when you should be running your business.
You can do this one of two ways:
Either you can hire an accountant, either as part of their own firm or on staff at your company, to keep track of cash flow. Or, if that isn’t an option, you can designate and train an existing employee to keep track of cash flow for you.
Either way, take the financials off your plate to ensure effective handling of cash-flow.
Prioritize Cash Flow Over Profit
You know (or should) that cash flow and profit are not the same things. Cash flow refers to where the cash is come from and where it is going; literally how it is flowing in and out of your business.
Profit is the amount of money you have after all is said and spent.
Think of cash flow as a process, but profit as an end goal.
It’s tempting to think of profit as your ultimate focal point, with all your efforts bent on making that number larger. That kind of thinking though is a mistake.
Profit is the end result of a quality product or service mixed with a well-managed cash flow budget. It isn’t something that needs to be considered everyday because if your cash flow is managed well, the profits will come.
This really can’t be emphasized enough. Cash flow must come first. Profit will come, but it is a natural result of cash flow.
So don’t spend your time worrying over profit. Instead, focus on your cash flow and how best to keep it going smoothly.
Manage Invoices Quickly
The best way to keep a cash flow budget running well? Make sure that money keeps coming in.
This is a multi-faceted issue, as is everything that involves other humans, but in general, if you are staying well on top of your invoicing and billing, you will see the money for services rendered coming in.
It is also important, when you do invoice, to keep due dates in the immediate future. An invoice that is “due immediately” is less likely to be forgotten that one that is due in 15 days.
It is easy, with email and online invoice programs, to get invoices out quickly. Keep in mind that if you wait to invoice, you are pushing out your income even further.
Have Solid Payment Policies
It is vital when managing a cash flow budget to have payment terms set in stone prior to taking on work or selling a product.
It is so tempting, especially as a new business owner, to be more lax with payment policies. After all, if they pay eventually, what’s the issue, right?
While it is very tempting to always be the nice guy, good cash flow requires money to be coming in at a predictable rate. And for that, only solid payment policies will do.
Making sure these policies are clear and ironclad help minimize the risk of delinquent or late payments. It will also keep your relationships with your clients free of unnecessary conflict.
If everyone is clear on the policies from the beginning, there is less room for clients to dispute them later.
Make sure you know how you will handle single late payments and clients who make a habit of paying late. It may be necessary to implement a cash-on-demand policy for frequently delinquent customers.
Because you are dealing with fallible human beings, you have to account for some give and take in terms of payment. But by having a solid policy in place from the beginning, you can mitigate a lot of that risk.
Keep Clients In Mind
Another good way to keep clients paying when they should: Make it easy. The easier you make payments for clients the more likely they are to pay on time, every time.
Offering direct debit from an account is convenient because the client doesn’t even have to think about whether or not the invoice was paid.
Get online payments up and running to avoid clients having to write cheques, and offer discounts for clients who pay quickly. This is all made much easier by the world that now offers a myriad of payment options, from online merchants like Paypal to contactless debit.
Making sure your clients know you are thinking of them will help endear your business to them, which in turn will make sure the cash continues flowing in.
Keeping a well-managed cash flow budget isn’t aways easy. Its importance to your business, however, can’t be overstated.
Ensuring that your cash flow budget is well- managed will help you foresee potential problems before they arise, keep clients paying, and ensure that a profitable business in on the horizon.