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The Ultimate Guide to Cash Flow Management

No matter how large or small your business is, keeping tabs on cash flow can be difficult but necessary. Knowing how much you have at any given moment allows you to not only run your business now but make plans for your business’s future. It’s true what they say—cash is king. And that means cash flow management is the lifeblood of the kingdom.

If you have no cash flow, your profits mean nothing. There have been many profitable businesses on paper that ended up bankrupt—cash inflow didn’t match cash outflow. Without good cash flow analysis and management, you’re leaving your business susceptible to failure. Maybe one month you can’t restock much-needed supplies or you’re otherwise unable to meet your business’s immediate needs.

So, let’s go over cash flow—what it is, why it’s important and how you can maintain a successful business.

What Is Cash Flow?

Cash flow is the result of cash equivalents plus net cash that flows into your business (cash inflow) and any expenses that cause cash to flow out of your business (cash outflow) for a given period of time.

A company with good cash flow can maintain current expenses and then some. Cash flow is one of the most important measurements of a business’s success and overall financial health.

Why Is Managing Cash Flow Important?

According to a study by US Bank, 82 percent of businesses fail because of cash flow problems. When it comes to startups, that figure is a startling 90 percent. Some more daunting figures include:

  • 73 percent of businesses fail because they miscalculate potential sales and don’t realize what goes into maintaining a successful business.
  • 78 percent fail because they don’t do proper research before opening and lack a solid business plan.

Other reasons businesses fail include lacking experience, poor business location, inventory mismanagement, and over-investing in the business’s fixed assets.

Proper cash flow management and analysis ensure you can maintain your business.

What is the Difference Between Positive Cash Flow and Negative Cash Flow?

Positive cash flow happens when the amount of cash coming into your company is more than the cash you’re outlaying.

Cash inflow can come from such things as sales and accounts receivable. Cash outflow occurs for such things as accounts payable, payroll, and other monthly business expenses.

Negative cash flow, on the other hand, indicates a cash flow problem. It occurs when you have more cash outflow each month than cash inflow.

How to Improve and Manage Cash Flow

A lot of business owners think scaling and growth are the answers to cash flow problems, which is why many owners—while they succeed at growing their business—often realize too late that they’ve also grown their cash flow issues, too. For proper cash flow analysis and management, if you want to grow your business while improving and managing cash flow, you must have a plan.

Plan how you’ll grow, how you’ll scale up, and how much cash outflow will increase as business increases. The following are some of the best steps you can take for better cash flow management, especially if you want to grow:

Collect on Receivables

What can you do to speed up the process of receiving amounts owed to you? Properly timed invoicing never hurts, but you can also:

  • Opt for lockbox service through your bank
  • Ask your clients to preauthorize payment, whether as a debit or credit card set up for autopay or preauthorized checks
  • Move all your business banking into one financial institution
  • Offer discounts to clients who pay before the due date

Tighten Your Business’s Credit Requirements

It’s a fact of business—sometimes you have to offer items or services to your customers on credit, especially if you’re a new business or you’re scaling up. But it pays to research your customers before an offer to extend credit. For instance, ask yourself:

  • How long have they been a customer?
  • What’s their current payment track record with you?
  • How is their own business faring?
  • Do they or their business currently have cash flow issues?

It’s worth your while to request a business credit report for their business. Asking for references is also a good idea. If you have a merchant account, you can accept credit cards that can help customers make timely payments and ensure your own cash flow remains in the black.

Boost Your Sales

If you want to improve your cash flow, it’s almost a no-brainer—you need to sell more products or services, right? This means you either need to attract new clients or simply upsell the customers you already have. Well, simply might not be the right wording—it’s a lot easier said than done. Attracting new customers is something all growing businesses need to do, but it’s time-consuming and costs money converting leads into sales.

It’s less expensive to upsell your current clientele for many reasons. For instance:

  • You don’t need to pull them in with any special discounts or sales
  • You have all their purchase history and data

You can use this information and review what they currently buy most and how often to upsell packages or bulk deals. This typically leads to an increased profit margin and, hopefully, better cash flow. It’s imperative, however, that you’re careful in this respect because if all these upsells are on credit, you’re only increasing accounts receivable not your cash flow.

(Carefully) Offer Discounts

As mentioned above, offering a discount for early payment is one way to get cash flowing through your business. It may put a small dent in profits, but it can help your cash flow management to incentivize customers to pay earlier than their current billing cycle.

You can also take advantage of this tactic with your suppliers or other accounts payable you may have. Ask your creditors about discounts for early payments, but be sure it won’t leave you with a cash shortage in the meantime.

Secure a Loan

A short-term cash flow issue can sometimes wreak such havoc on your business finances that it calls for securing a loan. There are multiple types of business loans available, such as small business lines of credit, revolving lines of credit, and business equity loans. Usually, this short-term band-aid can get you through a money crunch. But remember the market fluctuates due to many outside variables, such as natural disasters. When a financial crisis hits everyone at the same time, like in 2008 and 2020, banks often call in the loans they’ve serviced or cancel credit lines. If you need a short-term loan, secure one—just don’t rely on this type of financing to continuously get you through tough times.

How to Protect Your Cash Flow

Cash flow management best practices include:

  • Immediate invoicing
  • Short billing cycles
  • Early payment incentives
  • Staying on top of overdue invoices
  • Paying your accounts payable on time

But what if You’re a Small Business Owner?

You can still manage your cash flow. You need to forecast—make sure that what you collect from sales activities is enough to cover your monthly expenses. Sometimes, even with the best intentions, this isn’t always feasible. If cash flow turns negative for a short period of time, cutting back on unnecessary expenses can help. If you experience a long-term cash flow crunch, an invoice funding option can help you stay afloat so you can use your funds for investments, inventory, or other items that can help you generate revenue.

Automating cash flow forecasts and management helps free up your time so you can take a look at cash flow at a glance as often as you need to. It helps you make smart decisions, such as considering a merchant account that Works For You™.

About LOLA POS

LOLA POS is a merchant advocacy group dedicated to reducing or eliminating the unnecessary fees associated with accepting credit card payments. Since 2004, LOLA POS’s payment processing solutions have been delivering tailored solutions, best-in-class customer service, and high-quality service offerings for businesses across multiple industries. Whether it’s high-risk or low-risk, brick-and-mortar or e-commerce, LOLA POS will create the best processing experience for your company. For more information, visit us at our website or by calling (866) 509-7199.

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