7 min read
Everything about your business can be perfect – your people, your services, your advertising, and your market – but, no matter how flawless your business seems to be, you can still encounter cash flow problems that could threaten your company's future.
Key Takeaways
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Whether you're experiencing a cash flow challenge now or want to avoid one in the future, the following cash flow management strategies will help you save or safeguard your business from the most common reason businesses fail (82%, in fact) – cash flow shortages [1].
Looking at a balance sheet, income statement, and budget alone is going to give you a very cloudy picture of how much cash is actually flowing in and out of your company and how much you can expect to be there next week when payroll is due.
As a business owner, you should be looking at a regular cash flow statement and cash flow forecast that predicts what the next year, quarter, month, or even week is probably going to look like.
Forecasting helps you determine what your cash flow is going to look like in the future. It takes into consideration your company's past performance, the speed at which clients usually pay, and your currently expected receivables, in addition to your own schedule of payables, your current cash standing, and a slew of other factors.
Having a cash flow forecast gives you insight into what your future cash flow looks like so you can anticipate challenges before they happen – rather than reacting when it's already too late. As a result, you can prepare, plan, and execute new strategies to save your business from suffering the detrimental impacts of a cash flow shortage.
Now that you know the importance of a cash flow forecast, let’s get into the nitty-gritty details.
It starts with making sure you are getting timely, accurate financials. Accurate cash flow forecasting and successful cash flow management depend almost entirely on solid data collection.
Cash flow forecasting requires you to make an educated guess about your upcoming cash flow based on all of your company's past (accurate) financial data including:
With automated data collection that precisely tracks the cash flowing into and out of your business, you will have reliable information available at all times. With data at your fingertips, you'll be able to predict your future cash flow as accurately as is humanly possible.
- Art Saxby, CEO Chief Outsiders™
Managing receivables plays a key role.
When it comes to managing receivables, your top priority should always be to keep the cash flowing into your business.
To prevent cash flow shortages from occurring or help your business get through a current challenge, consider implementing the following best practices for managing receivables:
As always, make the most of the modern luxuries that are available to businesses. Responsibility-heavy, time-intensive tasks of the past can be easily automated today. Using fully integrated software from companies like Bill.com will take the pressure off of your bookkeeper with automatic invoicing, payment reminders, and prompt collections.
Strategic management of your payables is essential to both managing cash flow and saving your business in the event of a shortage.
Use this cheat sheet for accounts payable best practices to consider implementing:
Keeping that in mind, the more money you hang onto, the bigger your bottom line. So, before foregoing discounts or paying extra for flexible payment terms, really consider whether you need to skip over potential savings for improved cash flow management.
One of the most common reasons why businesses encounter cash flow shortages actually has nothing to do with the timing of payments- and everything to do with pricing problems.
Pricing is the number one decision any business owner will make. If you don't charge enough for your services, then you're going to suffer cash flow shortages – period.
So, how can you go about optimizing your pricing for better cash flow? Start by figuring out what your services are actually worth, so you can ask for the right price in return.
There are lots of ways to evaluate your pricing structure like considering your competition and the market. The best way (and what we recommend to our clients) is carefully evaluating your direct costs, allocating indirect expenses to jobs, identifying the gross profit margin you need to stay operational and growing, and building it into your prices.
What is one thing all of these cash flow management strategies have in common? The need to automate your back office with integrated software solutions.
Automation not only makes better cash flow management possible, but it also makes it realistic and affordable. With automated bookkeeping and accounting processes, you'll save time and avoid cash flow challenges.
A smart back-office gives you continual access to accurate financial data and cash flow statements in addition to perfectly timed invoices, collections, and bill payments. With cash flow management this well-coordinated, your business could win gold at the cash flow Olympics (if that were a thing), but you'll have to settle for winning future success, instead!