The cash flow of a small business is not unlike the act of breathing. Fresh oxygen (cash earnings) in; carbon dioxide (cash expenses) out. For most of us, our respiratory system takes care of itself. Our financials, on the other hand, need special care.
Good news: you don’t have to be a CPA to successfully manage cash flow for your small business. With a watchful eye and the right accounting system, you have complete control over what comes in and what goes out.
Here’s a quick primer on the concept of cash flow and how to keep yours in balance.
What is Cash Flow?
Cash flow is the amount of cash moving into and out of a business.
In-bound cash (income) is usually:
- Payments from clients for your services
- Reimbursements from insurance companies for your services
Out-bound cash (expenses) includes:
- Loan payments
Much like with your personal finances, the goal is to make more than you spend. But small businesses don’t always work that way. You may need a new piece of equipment or software to offer a service that will net a higher income in the long-term, but you don’t have the cash in hand to pay for it outright.
In the beginning, you might not have the client base to cover basic costs every month. Or, an unexpected business expense like a rent increase or building repair could exceed what you bring in for a month or two. You might also run into the scenario where your income is held up (waiting for checks to clear) while bills are due.
There are myriad scenarios that illustrate why one of the biggest factors for small business failure is running out of money. And it always comes back to cash flow. If yours is out of balance during good times, an unanticipated expense could put you out of business.
How to Manage Cash Flow
The number one way to manage and measure your cash flow is to meticulously track your earnings and your expenses. Your default action might be to start an Excel spreadsheet to track everything. But that will quickly become a massive chore to maintain. Cloud-based accounting solutions empower you to work smarter, not harder.
When you manage your accounting with a tool like FreshBooks, you’ll have a clear line of sight to what’s coming in and what’s going out so you can stop problems before they start. You’ll be able to stay on top of how much each customer owes you and you’ll be able to generate useful reports so you understand your cash flow much more easily.
And you don’t have to block off an entire workday every month to keep it current. The simple interface works as easily on a tablet or smartphone as it does on your computer. Cloud accounting makes invoicing and expense-management a series of small tasks you can manage at the moment instead of one huge job every few weeks.
Of course, there are lots of ways to help you keep your cash flow constant. Here are a few:
Minimize expenses. Be thoughtful about every business expense you incur to keep outbound costs as low as possible.
Avoid credit. Sometimes a loan is necessary to finance business-related expenses. But it should be treated as a last resort, not something you turn to every month.
Renegotiate lending terms. Avoid paying a penny more than you need to by talking to your credit provider to make sure you’ve got the best possible rate. Explore the differences between a business loan, line of credit and credit card.
Keep minimal inventory. Too much product inventory can eat into cash flow. Keep your supplies as low as possible.
Raise your rates. If it’s been awhile since you opened your business or raised your rates, research the competition and adjust your rates to market value.
Make payments easy for clients. In addition to in-person payments, allow your clients to pay online via Stripe, credit card and other methods.
Invest in your business. When you find yourself with profit, set up an investment or savings account you can turn to so your cash flow isn’t disrupted when the inevitable but unexpected expense happens.
Like most things in life, being organized will help you maintain a positive cash flow. After all, if you don’t know where you stand, you can’t take steps to prevent a problem or nip one in the bud. That’s why having a good accounting system in place is key.
The second element is making smart business decisions with the information you have. Avoiding credit, curbing expenses and setting aside a cushion will help you stay in the black.
It may take a bit of work to make a small business work as efficiently as the human body, but it can be done!
This guest post was written by FreshBooks for the Artichoke blog. FreshBooks makes invoicing and accounting painless for millions of small business owners.
About the Author
Heather Hudson is an accomplished freelance writer and journalist based in Toronto. She writes for a number of publishing, corporate and agency clients who depend on her to deliver high-quality, on-brand content and journalism with a fresh perspective. Learn more about her work at heatherhudson.ca.