Cash flow is the lifeblood of any business, and managing it has a huge impact on a business. When a business owner wears multiple hats, finance may not be their area of strength, but having a solid understanding of the basics helps them be more successful.
These five principals are a strong place to begin.
1. Understand your current cash flow situation
Before you can control business cash flow, it’s important to analyze current spending. Cash flow management includes understanding the trends of cash coming in and out of the business, how any seasonal needs impact that flow, how much cash is typically on hand at any given time, and where shortfalls or overage tends to occur.
2. Write down projections for the upcoming year
Once the habits of the business is defined, creating a cash flow projection to understand what lies ahead can flush out new information or future borrowing needs. Getting ahead of what’s happening allows the necessary time for seeking funding, deciding where to spend or save, and other key behaviors. While you can’t foresee everything, detailing out what you do know is a savvy cash flow management tactic. Get it out of your head and onto paper.
3. Meet with an experienced good business banker at least annually
Understanding how to balance cash flow and credit is a critical business skill that is essential for success. Rather than simply applying for a loan when you need one, proactively leveraging business assets and credit is a skill any good banker can help you learn. Depending where you bank—a large national chain or a community bank–their expertise may be available for the asking. They may also be able to help with business operations or cash flow information, and meeting annually will allow them to review your other accounts to ensure they’re still the right fit, such as checking accounts and merchant card services.
While you’re speaking to a banker about these, discussing upcoming business equipment needs is another smart move. They can advise you on leasing versus buying options.
4. Obtain a business line of credit before you need one.
It takes time to obtain and can sit unused, so waiting until it’s already needed to apply can cause a financially disastrous delay in having funds available if payroll is short or other short-term cash needs occur. While it should be used carefully, which is something a banker can advise you on, a business line of credit is a resource that every business should have available.
5. Send invoices out quickly and stay on top of accounts receivables
Some small business owners prefer to focus their favorite activities within their business-the reason they began it in the first place—and accounting tasks can fall behind if they don’t’ enjoy them, but remaining on top of accounts receivables and accounts payables is the foundation of cash flow. Sending invoices out promptly helps bring cash in more quickly, and staying on top of accounts receivables can help you collect from slow paying customers. Putting off the tasks until they are absolutely necessary hurts the business.
If your invoices tend to be sizable, avoiding habitually slow customers by running credit checks can also help in cash flow management. Knowing in advance allows you to adjust where necessary. You might decide to decline the sale, change your projections based on their expected impact on cash flow, or extend term for the sale that adjusts for potential issues.
To learn more about the basics of cash flow management, Horizon Community Bank is here to help. Contact us today at the branch nearest you to schedule an appointment