If you have owned your business for any length of time, you might know what it is like to run short of cash for your business. This leads to an inability to meet your business obligations, such as paying your suppliers, creditors, or employees. It’s an unpleasant situation to be in, to say the least, and definitely not an experience you want to repeat. Your business cannot survive without positive cash flow. So, learning some basic cash flow management techniques is the first step to ensuring that your business survives and thrives through the ups and downs of business.
Why is positive cash flow so important?
Cash flow is how money moves through your business. If you have positive cash flow, you have more physical cash coming into your business than leaving every month. Once you have this cash, you are able to pay your suppliers and other creditors, buy more inventory to continue your business, reinvest cash to expand, and pay yourself.
The problem comes when you make sales “on paper” but haven’t actually received the cash from them, and there is more cash going out than coming in. This is negative cash flow. There can be many reasons for negative cash flow in a given month, and all of them lead to awkward situations. Maybe your payment terms are too generous, and your customers are paying you late. It also can be the case you don’t have a good invoice system in place. Or maybe you are having budgeting troubles, and you spent the money you had on a new piece of equipment before you paid your other obligations. In any case, if you wish to continue to have a solvent business, you need to turn this situation around and quickly.
Tips to always have a positive cash flow
1. Invoice customers promptly and have payment terms that work for you.
Maybe you require your customers to pay within 60 days. If this isn’t working for you, or if your customers routinely wait until the end of the period to pay, you may need to reduce it to 30 or even 15 days. Or maybe you’re just so busy with other tasks to keep your business afloat that you put off processing your invoices. That can lead to the customers receiving them late and you receiving their payments even later. In this case, it is time for you to use an electronic invoicing service like Automa8e, which generates invoices for your customers and allows you to send email reminders as the payment due date comes near. Automa8e also helps the business owner to analyze the payment pattern and AR receivable days ratio to determine the credit terms. The business owners should review the customer’s credit terms regularly.
2. Make wise inventory and sales decisions to maximise sale and keep inventory moving.
If you have a lot of money tied up in inventory, that may be affecting your cash flow. Study your products to see which ones are selling well, cycling between cash to inventory to cash again, and which ones are sitting in inventory, not turning back into cash. You may need to sell your slow-moving inventory items at a discount to get the cash from them and then focus your inventory on items with a faster turnover. With Automa8e, you can see at a glance what your best-selling items are by region and seller to make future purchasing decisions.
3. Watch where you spend your money and borrow before you need some.
If you’ve been having negative cash flow problems for a few months now, take some time to study your books and see where your money is going (or not going). This can help you to create a cash flow forecast to see what your cash flow needs might be for the next quarter.
The first step to creating a cash flow forecast is to lay out all your upcoming expenses, both one-time and recurring. Make sure you include everything – rent, software, salary, marketing – and when it is due.
The second step is to forecast your revenue. This can be tricky, as you don’t know exactly what sales you will make, but do the best you can base on historical data. Start with any guaranteed revenues, and continue on to make the most accurate estimate you can of sales. If you have more than one revenue stream for your business, make a separate line on your spreadsheet for each revenue stream.
Next, you need to keep your cash flow statement updated every week. Make sure that your cash flow statement matches your bank statement balance, and reconcile it if it doesn’t for some reason.
After you have done this, you will be able to look ahead for a month or two to see where you will have any cash shortfalls. This will enable you to work out payment plans with suppliers ahead of time or borrow money for a foreseen shortfall.
Cashflow statement indirect method
If this method does not work for you, you can also make a cash flow statement using the indirect method. With this method, you can deduce your cash flow from your net income for the month. Cash flow can be calculated indirectly by starting with your net income and making adjustments based on various balance sheet items, thereby converting accrual income to actual cash.
Timing is key
As you can see, timing and prior planning are the keys to successful cash flow management. Consistently having positive cash flow sets your business on the path to success, month over month and year over year. You will be able to have money to meet your obligations, pay yourself a salary, and be able to reinvest money in your business to take it to the next level.
Automa8e is accounting software that will help you with all your accounting needs. It has an invoicing module that allows you to invoice your customers in a timely manner. You can also send an email reminder through Automa8e to remind your customers about payment, ensuring that you get paid on time and the cash you need on time. It can also accommodate different currency needs if you are invoicing customers from across the world.
Automa8e can also help with your long-term cash flow forecasting needs. Its real-time data and one-click reports make it easier to see what your exact financial position is every day. You can also keep your data for as many months back as you need. This historical data will make it easier than ever to create an accurate forecast for your next month or quarter. With its intuitive interface and multi-currency module for global transactions, Automa8e is the future of cloud accounting software.