If you are in the financial industry, you are likely familiar with the saying, “cash is king.” As business owners, cash is essential for your everyday operations. Without maintaining the funds necessary to meet the needs of your business, you will not be able to pay employers, suppliers, rent or any operating expenses.
Effective cash management is crucial in order to maintain and grow your business, as poor cash management can be one of many reasons businesses fail. Here are my top five tips on how to improve your business’s cash flow:
- Plan ahead with cash flow worksheets: Cash flow worksheets are crucial in looking for ways to improve cash flow because they can help organize cash and recognize potential problems. These worksheets let you as a business owner evaluate their business on a 12-month cycle and create a cash flow projection, allowing you to approximate monthly sales, expenses and product performance.
- Set short payment terms: Business owners typically give customers 30, 60 or 90 days to pay. However, waiting to be paid can stall cash flow. My advice – do not wait! What many businesses do not realize is that those timelines are not mandatory. Instead, consider setting your own terms that are tailored to your business up front. This will allow you to establish a more effective billing process and avoid unnecessarily long billing cycles. Accepting additional payment types can also help improve your payments by ensuring that you’re not limited to cash or check only sales and can receive funds as soon as possible.
- Use lines of credit as needed: Lines of credit are useful because the monthly payments you make and the interest that accrues are directly related to the amount of credit you use. Consequently, if you end up not needing to draw the line of credit, you will not pay interest on it. As a business owner, you should always consider applying for a line of credit even if you do not need it right away. If you wait to set up a line of credit until your profits decline, that is an indication of financial strain and you will likely have a difficult time getting approved.
- Sign-up for a business credit card: Credit cards allow for the flexibility to use as much or as little as you need of your designated credit limit, and tend to be most appropriate for operating expenses. However, before signing up for a credit card, it is important to make sure you are comfortable with your interest rates so you are not shocked by the true cost. To get educated on which credit cards work best for you, always compare different rewards programs.
- Keep in mind how taxes affect cash flow: When planning how to use your cash, business owners often opt to pay the least amount of taxes by minimizing profits. However, if they plan on needing any financing in the next 12 to 36 months, they will need to show their profits. Poor planning and solely focusing on minimizing taxes will make it harder, if not impossible, to qualify for any financing. If you choose to take this approach, you may be left with limited resources if you ever run into trouble.
Ultimately, a company has to generate a certain amount of cash flow to survive. Using these tips will not only help you generate effective cash flow for your business, but will also help to ensure your business’s long-term success. QCBN
By David Dinerman, QCBN