Positive cash flow for a project or business--money readily available for use at any given time--is one of the most vital signs of a healthy business. A business needs to bring in enough money to pay expenses on time or the owners may find themselves scrambling to cut costs and/or find alternate funding in a pinch rather than when it is strategically necessary. With all that time-pressed small business owners need to do, it’s not surprising that many don’t keep tabs on their cash flow.
A way to overcome this challenge and keep a steady eye on the cash coming in and going out of your business is to regularly conduct a cash flow analysis and establish sound cash flow management practices. Each serves a specific purpose and it’s important to understand the difference between the two.
Cash Flow Analysis: Part Historical Accounting and Part Soothsayer
A cash flow analysis statement includes incoming cash from sales or products and services, loans, line of credit and equipment or other asset sales. Cash flowing out of the business includes payroll, rent, business expenditures, purchases, loan payments, and interest. Historical financial records are often used to help you make an educated guess about future payment and billing patterns. While this is not a perfect forecaster, a cash flow analysis may help eliminate surprises. Many financial software packages for business include a method to track cash flow. We’ve included an example below.
Here’s an overview of the process:
- Using historical data, track the trends in accounts receivable and accounts payable for the last week, month, quarter, and/or year.
- Use that review to project upcoming trends in accounts receivable and payable during a similar term. Take into account customer payment histories, the buying season, and any other relevant data.
- Estimate the amount of cash you will have on hand during that term.
- Evaluate whether you will have a shortfall or surplus when bills are due during this period. If you do anticipate a shortfall, make adjustments as needed.
Cash Flow Management: Taking Control of Accounts Receivable and Payable
Simply put, cash flow management is generating practices that speed incoming payments into the business and slow outgoing payments as much as possible to pay them with cash on hand rather than projected future revenue. Successfully managing the lag time between the cash in and cash out will give you the ability to pay your expenses and grow your business. The trick is establishing the cash flow management plan upfront to help you take control of the process. Here are some tips to help you get started.
- Get payment the day that you make the sale, if possible. If not, send invoices promptly.
- Improve receivables by offering discounts to customers who pay their bills early and adding surcharges to those who pay late.
- Identify slow-paying customers and institute a cash-on-delivery policy with them.
- Push your own payments to the maximum timeframe allowed. If a bill is due from your creditor in 30 days, don’t pay it early. Use electronic transfers to pay it the day it is due. Weigh the savings of early payment discounts against the value of keeping the money in your account until the last possible day.
- Consider suppliers with flexible terms in the event that you need to delay a payment.
- Arrange for a line of credit at your bank to cover a temporary shortfall in cash.
We hope this helps you take a few steps to gain or keep control of your cash flow. And, if this blog was helpful, you might be interested in reading Your Small Business Loan Application Checklist.
If your business has a need for start-up financing, long-term capital investments, or working capital to grow, contact our experienced, local Small Business Loan Team or visit your local branch today!