How To Maintain A Healthy Cash Flow For Your Business
There are several key components that contribute to the success of your business — hardworking employees, identifying and marketing to your target audience, and providing high-quality goods and services. However, one of the most important components that contributes to the success of your business is bringing in and maintaining a healthy cash flow.
Let’s face it: Without capital flowing in and out of your business, your doors aren’t going to stay open for long. Maintaining a healthy cash flow will help your business stay afloat and make it profitable and successful.
In this post, we’re going to look at different ways to manage your cash flow. Now, this article won’t be centered on improving cash flow (you can read more about that here). Instead, we’re going at ways you can manage and maintain a healthy cash flow. In other words, we’re going to help you more strategically work with what you’ve got. Let’s jump in.
Table of Contents
- Cash Flow Basics
- What Is Cash Flow Management?
- How To Manage Cash Flow
- Getting A Handle On Your Business’s Cash Flow Management
Cash Flow Basics
Before we break down ways to manage and maintain a healthy cash flow, it’s important to understand what cash flow is and what it means for your business.
Simply put, cash flow is the cash that comes in and goes out of your business. Cash flows in from things like sales, business loans, and returns on investments. Cash flows out to cover expenses like operating costs, inventory, supplies, and payroll.
Cash flow can be positive or negative. This means:
- Positive Cash Flow: The amount of cash that is coming into your business is more than the amount of cash going out of your business.
- Example: This month, your business brings in $20,000 through sales, investments, accounts receivable, and financing. Your total liabilities, expenses, accounts payable, and payroll total is $15,000. In this example, your cash flow is positive.
$20,000 – $15,000 = $5,000
- Negative Cash Flow: The amount of cash that is coming into your business is less than the amount of cash going out of your business through things like payroll, expenses, and accounts payable.
- Example: Last month, your business earned $10,000 through sales, investments, accounts receivable, and financing. Your total liabilities, expenses, accounts payable, and payroll are $12,000. In this example, your cash flow is negative.
$10,000 – $12,000 = -$2,000
If your cash flow is positive? Great! That’s exactly what you want to see. But don’t sit back and think you’re completely in the clear. Your cash flow can be impacted positively or negatively from month-to-month — or even day-to-day! This is why it’s so important to always keep an eye on the numbers and take steps (like those we’re about to dive into) to manage and maintain a healthy cash flow.
What Is Cash Flow Management?
Cash flow management means tracking the cash that is coming into and out of your business. Utilizing cash flow management within your business helps identify where money is coming from and how much is coming in. It also helps you identify the outflow of money and where it’s going.
Not only does this give you an idea of how much cash you have on-hand at this moment but it can give you insight into your cash flow in the future. By tracking your company’s cash flow, you can spot trends, changes, and potential problems that can be corrected sooner rather than later.
How To Manage Cash Flow
Managing your cash flow — tracking cash that flows in and out of your business — is imperative to the success of your business. The good news is that there are a variety of tips and tools at your disposal that make it easy to manage your cash flow.
Open A Business Bank Account
A common mistake that many new business owners make is mixing their business and personal finances. This can get complicated over time, making it confusing to track business income and expenses, and can be a nightmare come tax time. Keep your business and personal finances separate by opening a business bank account.
Your business bank account can be used for your incoming payments and to pay your business expenses. You can link this account to your accounting software (more on that later) to easily track your cash flow. As a bonus, most lenders require a business bank account if you seek financing, so it’s good to go ahead and get your account set up as soon as possible.
Build A Cash Reserve
Even if your cash flow is positive now, things can change in an instant. It’s best to be prepared for these potential setbacks with a cash reserve. Having a cash cushion at the ready can help you navigate unexpected financial challenges — seasonal slowdowns, an emergency expense, or a pile of unpaid invoices, for example.
A general rule of thumb is to keep at least three months’ worth of expenses as a buffer. This number may be adjusted up or down based on your specific cash flow situation and the needs of your business. While setting your own funds aside for this purpose is best, you may also choose to add a business credit card, revolving line of credit, or bank overdraft protection in the mix to further boost your reserves.
Keep Track Of Money Owed
Do you invoice your customers immediately, or do you tend to procrastinate? Once you’ve sent the invoices, do you stay on top of payments by sending out statements and reminders … or does this typically fall through the cracks?
Keeping up with money owed to you and actually collecting it is critical to maintaining a healthy cash flow. Sure, you may be working with a positive cash flow now, but what happens next month when those invoices remain unpaid? Accounting software makes it easier than ever to create professional invoices, send invoices to clients, collect payment, and even set up automated reminders or recurring invoices to repeat customers. Which leads us to…
Choose The Right Accounting Software
Accounting software is a must-have for any business. There’s a long list of reasons why you should be using accounting software, but one of the most important is that it allows you to track money that’s coming in and out of your business — often, in real-time, depending on your software’s capabilities. You can also send invoices, statements, estimates, and payment reminders. Additional features offered by your software may include inventory tracking, payroll, and other helpful tools to help you maintain and grow your business.
If you’re new to accounting software, take a look at our software reviews and our top picks, and give a few programs a try. Some are free to get started, while others offer free trials. If you already use accounting software, evaluate its features to determine if it’s offering everything you need to manage your cash flow.
Stay On Top Of Your Accounting
Finding the right software for your business is only the first step. To efficiently and effectively manage cash flow, it is up to you to monitor and maintain accurate accounting records.
Sure, your software will automate a lot of processes that you don’t have to perform manually (for example, automatically updating transactions through live bank feeds). This doesn’t mean that you can set it and forget it. Make a habit of looking over your transactions, checking in on unpaid invoices, and performing other tasks to ensure your cash flow is stable.
Another way to track your cash flow both now — and in the future — is with reports. Remember that accounting software we talked about? Most programs can (at the very least) pull basic financial reports, giving you an overview of your current cash flow situation. You may even have access to advanced reporting that allows you to look at future cash flow projections based on current and previous trends. You can use these reports to determine where you’re falling short (i.e., unpaid invoices or an expense that can be cut) and make changes to maintain your cash flow.
Know Your Risks & Be Prepared
Running your own business can be, well, risky business. A number of challenges can affect your cash flow — from a slow-down in customers to a more widespread crisis. In the 2000s alone, we’ve already faced the Great Recession of 2008 and the COVID-19 pandemic of 2020 — and no one knows what the future holds. However, you can assess risk and be prepared for these situations.
Since every business is different, the risks and challenges you face will be unique to your business. Think of possible scenarios that may have a significant impact on your business (and your cash flow). Use your accounting software or reports to look over the numbers and experiment with different scenarios. For example, what would happen if you lost one of your biggest clients? What would happen if you were forced to shut your doors for a week … or longer? Knowing the numbers and running through various scenarios can help you determine factors like how much money you need to bring in to continue to operate, where you could cut expenses if absolutely necessary, and could help you plan for the future — no matter what it may hold.
Getting A Handle On Your Business’s Cash Flow Management
Managing your cash flow doesn’t have to be difficult, especially when you’re willing to put in a little time to track the numbers, analyze your cash flow, and use software and tools that are at your disposal. Looking to improve your cash flow? Check out our post on 10 Strategies To Improve Cash Flow. Want to boost your cash flow? Take a look at our article The Best Cash Flow Loans For Small Businesses In 2020.
For now, though, focus on strategizing, planning, and tracking your cash flow to keep your business more secure now and in the future. Good luck!