Small Business Basics: The Six Rules for Proper Cash Flow Management

Posted on Nov 28 2015 - 12:01am by Business Day TV

CashOne of the main reasons for businesses to fail is because of terrible cash flow management. They may be profitable, earning high sales every quarter without fail, but they were constantly lacking in the cash needed to operate. Things like paying employee wages and ordering supplies cannot wait, so it is important that you always have liquid funds available.

This may sound like an easily preventable mistake, but running a business is immensely complicated. It is not surprising that inexperienced owners sometimes commit major errors that throttle their cash flow.

To prevent this from happening, follow these simple rules:

1. Do regular forecasts.

Your accounting department should be preparing a cash flow forecast for every quarter. Consider existing receivables and expenses, and then factor in predictions of sales based on past performance. This allows you to plan for lean months.

2. Work with a good bank.

Apart from setting up a business bank account in Bloomington to handle your cash inflows and outflows with ease, look into other services. Securing a good line of credit can make a huge difference.

3. Stop selling on credit

Businesses that have high sales but no cash usually wind up in that situation because they are too generous when offering credit to customers. Avoid excessively long payment periods, and keep close track of what customers owe you.

4. Collect receivables

Make sure that your collections department is doing its job correctly. Incentivize early payments for customers with discounts or special benefits, while maintaining regular contact with buyers having overdue payments.

5. Be careful with investments

Purchasing expensive equipment, hiring new employees, or even opening a new branch is a decision you should not take lightly. Make sure the business can easily support any new investments you make.

6. Pay off debt

By paying off debt, you remove some of the business’ monthly obligations, which help in reducing the cash flow burden. There is a fine balance between doing this and maintaining a healthy cash buffer, though.

While it is easy to focus only on sales and the bottom line, remember that cash is king in business. Always pay attention to your available funds.