3 Ways to Protect Cash Flow for Your Small Business
Cash, there’s no way around it, your business needs it. Cash flow has always been a struggle for businesses, and the pandemic has made this challenge even harder; costs are up, supply chains are broken, the workforce is limited - is your heart rate rising too? Ok enough of that…let’s focus on the good news. Despite all of these factors working against us, so much is still in our control.
To keep your zen and the dollars in your pocket, follow these three steps:
Make sure you have enough money in the bank
The number-one rule of running any business is to make sure you have enough money in the bank to support your day-to-day operations. You need enough money to pay salaries, cover any outstanding expenses and keep up with regular expenses like rent, utilities and advertising costs. Even if you don't have much income coming in, you need a cushion that will allow you to get through the lean times.
It's usually best for new businesses to avoid getting into debt. If you borrow money, be sure you can repay it as soon as possible. The more debt a business has, the less flexibility it has — and that means the more vulnerable it is to sudden changes in the economy or in consumer demand.
One of the best ways to manage money is to keep track of how much money comes in (sales) and how much goes out (expenses). This approach is called cash accounting because it relies on actual cash flow rather than accrual accounting, which takes estimates into account. Accrual accounting looks at revenue and expenses before they actually occur, while cash accounting waits until actual cash changes hands.
Be realistic about the amount of money needed to cover unpaid invoices
It's a common scenario: you get an invoice from your landlord or utility company, but it's not due for a while. You put it in a drawer and forget about it. Trying to keep up with what invoices you need to pay, how much they are for and when you should pay them is a full time job in itself.
If you're organized enough to keep track of your unpaid bills, then you probably have them arranged by due date - which is a great start. But if you're like most people, you just throw bills in a pile in a drawer and sort through them when they come due. But by waiting until the due date for every single bill, you might be missing a few factors.
How much an unpaid bill will cost beginning at different times.
Calculating interest on debt is pretty straightforward — most lenders use a straightforward annual percentage rate (APR). But what about other costs? For example, if your utility company charges $10 per month in late fees, when do those fees kick in? If your rent goes up by $75 every three months, how many months' worth of increases are included in that first invoice? Keeping track of this can be dizzying. Sure it would be great if you could pay off all of your bills on the day they hit your desk, but for most small businesses and startups, that is just not possible. This is where hiring an accountant can come in handy.
A professional accountant can help you do an audit of your books and help you determine the best time and method to get your invoices paid. Having a professional accountant ensures that the right invoices will be paid at the right time for the right amount - all while you are focusing on actually running your business.
Track your cash flow on a weekly basis
In order to keep your business running smoothly, you need to track your cash flow on a weekly basis. How much cash is coming in? How much cash is going out? And crucially, how do you reconcile the two? You can find out by keeping a weekly cash flow record. This document is useful not only for helping you understand your business' financial health, but also for preparing tax returns and managing money in general. You'll know how much money you have going in, how much you're spending and how much you're saving.
Cash flow is really the life of the business. If it is managed well, the business will go well. Don’t leave your cash flow to chance, contact Daphne Johnson, CPA, today for a free consultation.
