10 Essential Cash Flow Management Tips for Small Businesses

Cash for your business is like oxygen for you and me. We die without it. Sorry for the dramatics. You likely know this already. Having said it, I can now sleep at night.

Small Businesses today need to actively manage their cash flow more than ever. If your business is really small, a few of these tips won't apply. However, even just $1 earlier strengthens your company.

1. Don't Pay Bills Until They're Due

It is tempting (indeed) to pay bills as soon as they arrive; however, that can hurt your cash flow. Keep your cash on hand for emergencies or opportunities (such as discounts for early payments). Use accounting software—like QuickBooks—to track unpaid bills and remind you when to pay them on time. Although this seems prudent, one must be cautious (because) it can lead to unforeseen complications.

2. Invoice Customers Quickly

Once (your work) is complete, send invoice right away. The sooner your customers receive their invoice, the quicker they are likely to pay. If they wait too long (however), they might forget about the work you did; this leading to delays in payment. I had a manufacturing client that liked to 'batch process' invoices. It was easier  for the person doing the invoicing. Once we sat down and did the math for each week, each month, over the course of the year, my client saw a larger issue. They were spending a lot of money upfront to produce jobs for clients. The faster they recouped that money, the stronger they were. 

3. Reconcile Bank Accounts Regularly

Regularly (and diligently) checking your bank account against your records helps catch errors. This (practice) prevents overdrafts; however, which can incur fees and harm your relationships with vendors. Make sure every transaction is (carefully) accounted for to keep your finances in check. Although it may seem tedious, this attention to detail is crucial because small mistakes can lead to significant issues down the line.

4. Utilize a Line of Credit

At times (utilizing a line of credit) can prove advantageous; it permits avoidance of late fees or enables taking advantage of early payment discounts. For instance, if vendors provide a 2% discount for payments executed within ten days, employing a line of credit can facilitate saving money. However, this strategy may result in overspending, although it might appear beneficial initially. Because of this, one must exercise caution, but the possible savings could surpass the associated risks.

5. Accept Electronic Payments

Accepting electronic payments (1) accelerates cash flow; credit card payments—although they incur fees—reach your account more swiftly than checks. This speed can help you capitalize on discounts and avert cash flow challenges (however, it is essential to weigh the costs involved). Today this isn't such an issue. 95% of businesses do electronic payments. We want to make it easy for our customers to buy.

Take it a step further. Can you encourage electronic pre-payment. Can you turn a client into a subscription client where their card gets charged every month.

6. Deposit All Cash Daily

Make it a habit (1) to deposit all cash and checks daily. This practice prevents overdrafts and ensures your cash flow is accurately tracked; however, avoid temptation to withdraw cash for personal use before depositing it. Because this can complicate your financial records, maintaining discipline is crucial. Although it might be tempting, remember that consistency is key.

7. Invest Excess Cash Wisely

If you possess surplus cash (1), consider placing it in a money market account: these accounts generally offer superior interest rates compared to regular savings accounts. They provide a secure venue for growing your cash (2) without taking risks; however, they are not FDIC insured. Although this may deter some, many find it worthwhile (because of the better returns). As the market continues to improve, there are several opportunities to earn some interest on your excess cash positions. Keep in mind that any investing of your excess cash should be done in a way you can get it back quickly (liquid).

8. Establish a Petty Cash Fund

For small business expenses (it is advisable to) maintain a petty cash fund. This avoids the hassle of writing checks for minor purchases; however, it simplifies transactions like buying lunch for the team. It keeps your accounting tidy (because) it allows for quick access to cash. Although some may prefer using cards, this method can be more efficient.

9. Segregate Cash Handling Duties

To prevent fraud (1), it is essential to separate cash handling and recording duties. One person (however) should manage cash, but another must handle bookkeeping. This division creates checks and balances; reducing the risk of errors (or theft). Although these measures are effective, they require diligent oversight (to ensure compliance) because without it, the system may falter.

If you have a really small business it's likely this won't help. You might be the only person touching the books. Or if you have someone doing the books, it's going to be the same person around. Just be aware that as you grow, it's not a bad idea to separate the duties to protect youself.

10. Determine Your Cash Conversion Cycle

Your cash conversion cycle (1) measures how long it takes for cash to flow back into your business after you invest in inventory; however, to improve cash flow, aim to shorten this cycle (2). Monitor how quickly you issue invoices (3) and follow up on payments, because this can lead to significant improvements. Although it may require effort, results are worth it.

Figure this out for your business right now. This is a standard KPI I use with my clients. This is a LEAD indicator for how well we are operating.

By implementing these tips, you can (indeed) take control of your cash flow. Remember: effective cash flow management is key to sustaining (and growing) your business. However, this requires diligence and attention to detail. Although it may seem challenging at first, you will find that rewards are worth the effort—because a well-managed cash flow can lead to greater stability (and success) in the long run.

If you'd like some help getting these things implemented in your business, schedule a short call with Brad.